e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-30684
BOOKHAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-1303994 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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2584 Junction Avenue |
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San Jose, California
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95134 |
(Address of Principal Executive Offices)
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(Zip Code) |
408-383-1400
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (check one):
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of November 3, 2006, there were 69,573,575 shares of common stock
outstanding.
BOOKHAM, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BOOKHAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
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September 30, |
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July 1, |
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2006 |
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2006
(a) |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
52,024 |
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$ |
37,750 |
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Restricted cash |
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6,178 |
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1,428 |
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Accounts receivable, net |
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27,005 |
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26,280 |
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Amounts due from related party, net |
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4,502 |
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7,499 |
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Inventories |
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51,612 |
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53,860 |
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Current deferred tax asset |
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348 |
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348 |
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Prepaid expenses and other current assets |
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7,768 |
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11,436 |
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Assets held for resale |
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9,808 |
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Total current assets |
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159,245 |
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138,601 |
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Long-term restricted cash |
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4,119 |
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Goodwill |
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8,881 |
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8,881 |
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Other intangible assets, net |
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17,823 |
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19,667 |
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Property and equipment, net |
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39,358 |
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52,163 |
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Non-current deferred tax asset |
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12,568 |
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12,911 |
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Other long-term assets |
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483 |
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455 |
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Total assets |
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$ |
238,358 |
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$ |
236,797 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
20,678 |
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$ |
26,143 |
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Liabilities to related party |
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4,707 |
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4,250 |
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Accrued expenses and other liabilities |
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30,967 |
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33,087 |
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Current deferred tax liability |
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12,568 |
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12,911 |
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Total current liabilities |
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68,920 |
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76,391 |
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Non-current deferred tax liability |
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348 |
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348 |
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Other long-term liabilities |
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2,998 |
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4,989 |
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Deferred gain on sale-leaseback |
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20,381 |
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19,928 |
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Total liabilities |
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92,647 |
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101,656 |
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Commitments and contingencies Note 10 |
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Stockholders equity: |
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Common stock: |
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$0.01 par value; 175,000,000 authorized;
69,573,575 and 57,978,908 issued and
outstanding at September 30, 2006 and July
1, 2006, respectively |
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696 |
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580 |
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Additional paid-in capital |
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1,084,180 |
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1,053,626 |
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Accumulated other comprehensive income |
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38,250 |
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35,460 |
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Accumulated deficit |
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(977,415 |
) |
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(954,525 |
) |
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Total stockholders equity |
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145,711 |
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135,141 |
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Total liabilities and stockholders equity |
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$ |
238,358 |
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$ |
236,797 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
(a) The
information in this column was derived from the Companys
audited consolidated balance sheet as of July 1, 2006.
3
BOOKHAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three months ended |
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September 30, 2006 |
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October 1, 2005 |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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$ |
41,762 |
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$ |
44,118 |
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Revenues from related party |
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14,629 |
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18,453 |
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Total
revenues |
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56,391 |
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62,571 |
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Cost of revenues |
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46,950 |
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48,196 |
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Gross profit |
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9,441 |
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14,375 |
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Operating expenses: |
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Research and development |
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11,493 |
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10,401 |
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Selling, general and administrative |
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12,859 |
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13,156 |
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Amortization of intangible assets |
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2,274 |
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2,693 |
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Restructuring charges |
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2,901 |
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1,805 |
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Legal settlement |
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490 |
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Impairment/(recovery) of other long-lived assets |
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1,901 |
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(1,263 |
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Gain on sale of property and equipment |
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(1,100 |
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(947 |
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Total operating expenses |
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30,818 |
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25,845 |
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Operating loss |
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(21,377 |
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(11,470 |
) |
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Other income/(expense), net: |
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Other income/(expense), net |
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214 |
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Interest income |
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177 |
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126 |
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Interest expense |
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(43 |
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(2,441 |
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Gain/(loss) on foreign exchange |
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(1,651 |
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1,251 |
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Total other income/(expense), net |
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(1,517 |
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(850 |
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Loss before income taxes |
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(22,894 |
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(12,320 |
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Income tax benefit |
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4 |
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11,785 |
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Net loss |
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$ |
(22,890 |
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$ |
(535 |
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Net loss per share (basic and diluted) |
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$ |
(0.38 |
) |
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$ |
(0.02 |
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Weighted average shares of common stock outstanding (basic and diluted) |
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60,178 |
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33,805 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
4
BOOKHAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three months ended |
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September 30, 2006 |
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October 1, 2005 |
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(Unaudited) |
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(Unaudited) |
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Cash flows used in operating activities: |
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Net loss |
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$ |
(22,890 |
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$ |
(535 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization |
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6,502 |
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7,712 |
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Stock-based compensation expense |
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1,923 |
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2,882 |
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Impairment/(Recovery) of long-lived assets |
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1,901 |
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(1,263 |
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Gain on sale of property and equipment |
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(1,100 |
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(947 |
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One time tax gain |
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(11,785 |
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Unrealized gain on foreign currency contracts |
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(662 |
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Foreign currency re-measurement of notes payable |
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441 |
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Amortization of deferred gain on sale leaseback |
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(275 |
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Amortization of interest expense for warrants and
beneficial conversion feature |
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662 |
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Changes in assets and liabilities, net of effects of
acquisitions: |
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Accounts receivable, net |
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3,234 |
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(2,662 |
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Inventories |
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3,129 |
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(4,266 |
) |
Prepaid expenses and other current assets |
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4,223 |
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1,288 |
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Accounts payable |
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(5,932 |
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1,256 |
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Accrued expenses and other liabilities |
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(4,614 |
) |
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(3,049 |
) |
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Net cash used in operating activities |
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(13,899 |
) |
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(10,928 |
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Cash flows provided by/(used in) investing activities: |
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Purchase of property and equipment |
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(2,293 |
) |
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(1,302 |
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Proceeds from sale of property and equipment |
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1,451 |
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888 |
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Acquisitions, net cash acquired |
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7,866 |
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Transfers (to)/from restricted cash |
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(611 |
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338 |
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Net cash provided by/(used in) investing activities |
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(1,453 |
) |
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7,790 |
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Cash flows provided by financing activities: |
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Proceeds from issuance of common stock |
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28,764 |
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Proceeds from sale of land held for re-sale |
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14,734 |
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Repayment of loans |
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(13 |
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(33 |
) |
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Net cash provided by financing activities |
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28,751 |
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14,701 |
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Effect of exchange rates on cash |
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875 |
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(1,273 |
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Net increase in cash and cash equivalents |
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14,274 |
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10,290 |
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Cash and cash equivalents at beginning of period |
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37,750 |
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24,934 |
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Cash and cash equivalents at end of period |
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$ |
52,024 |
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$ |
35,224 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
5
BOOKHAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Business
Bookham Technology plc was incorporated under the laws of England and Wales on September 22, 1988.
On September 10, 2004, pursuant to a scheme of arrangement under the laws of the United Kingdom,
Bookham Technology plc became a wholly-owned subsidiary of Bookham, Inc., a Delaware corporation.
Bookham, Inc. designs, manufactures and markets optical components, modules and subsystems
principally for use in the telecommunications industry. Bookham, Inc. also manufactures high-speed
electronic components for the telecommunications, defense and aerospace industries. References to
the Company mean Bookham, Inc. and its subsidiaries consolidated business activities since
September 10, 2004 and Bookham Technology plcs consolidated business activities prior to September
10, 2004.
Note 2. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements as of September 30, 2006 and
for the three months ended September 30, 2006 and October 1, 2005 have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and include the accounts
of Bookham, Inc. and all of its subsidiaries. Information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the consolidated financial position at September 30, 2006 and the
consolidated operating results and cash flows for the three months ended September 30, 2006 and
October 1, 2005. The consolidated results of operations for the three months ended September 30,
2006 are not necessarily indicative of results that may be expected for any other interim period or
for the full fiscal year ending June 30, 2007.
The condensed consolidated balance sheet at July 1, 2006 has been derived from the audited
consolidated financial statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete
financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the
Companys audited financial statements and notes for the year ended July 1, 2006 included in the
Companys Annual Report on Form 10-K for the fiscal year ended July 1, 2006.
On August 2, 2006, the Company, as parent, with Bookham Technology plc, New Focus, Inc. and Bookham
(US) Inc., each a wholly-owned subsidiary of the Company (collectively, the Borrowers), entered
into a credit agreement (the Credit Agreement) with Wells Fargo Foothill, Inc. and other lenders
regarding a three-year $25 million senior secured revolving credit facility. Advances are available
under the Credit Agreement based on 80% of qualified accounts
receivable, as defined in the Credit Agreement, at the
time the advance is requested.
On
August 31, 2006, the Company entered into an agreement for a
private placement of common stock and warrant pursuant to which
it issued and sold 8,696,000 shares of common stock and warrants to
purchase up to 2,174,000 shares
of common stock, which sale closed on September 1, 2006, and
issued and sold an additional 2,892,667 shares of common
stock and warrants to purchase an additional 724,667 shares of common stock in a
second closing on September 19, 2006, in both cases such shares of
common stock and warrants were issued and sold to certain accredited
investors. Net proceeds to the Company
from this private placement were a total of $28.8 million. The
warrants are exercisable during the period beginning on March 2, 2007
through September 1, 2011, at an exercise price of $4.00 per share.
In the Companys Annual Report of Form 10-K for the fiscal year ended July 1, 2006, the
Company disclosed that, based on its cash balances and its continuing
and expected losses for the foreseeable future, if it fails to meet managements current cash flow forecasts, or is unable
to draw sufficient amounts under the Credit Agreement for any reason, it will need to raise
additional funding of at least $10 million to $20 million through external sources prior to July
2007 in order to maintain sufficient financial resources to operate as a going concern through the
end of fiscal 2007. The Company also disclosed that, if necessary, it will attempt to raise
additional funds by any one or combination of the following: (i) completing the sale of certain
assets;
6
(ii) issuing equity, debt or convertible debt; and (iii) selling certain non core businesses, and
that there can be no assurance of the Companys ability to raise sufficient capital through these,
or any other efforts.
Since the filing of the Companys Annual Report on Form 10-K for the fiscal year ended July 1,
2006, the Company completed the second closing of the private placement referred to above,
resulting in gross proceeds of approximately $7.8 million. The Company has also signed an
agreement to sell its Paignton U.K. manufacturing site for gross proceeds of £5 million (approximately
$9.4 million based on an exchange rate of $1.88 to £1.00), in a transaction scheduled to close in
November 2006.
The
preparation of the Companys financial statements in conformity with generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses reported in those financial statements. These judgments
can be subjective and complex, and consequently actual results could differ from those estimates
and assumptions. Descriptions of these policies are included in the Companys Annual Report on Form
10-K for the year ended July 1, 2006.
Note 3. Stock-based Compensation Expense
On
July 3, 2005, the Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 123R Share-Based Payments, which
requires companies to recognize in their statement of operations all
share-based payments, including grants of stock options, based on the grant date fair value using the
modified-prospective-transition method. The application of SFAS No.
123R involves significant amounts of judgment in the determination of inputs into the Black-Scholes
model which the Company uses to determine the value of employee,
director and officer stock options. Inherent in this
model are assumptions related to expected stock price volatility, option life, risk free interest
rate and dividend yield. While the risk free interest rate and dividend yield are less subjective
assumptions, typically based on factual data derived from public sources, the expected stock-price
volatility and option life assumptions require a greater level of judgment which make them critical
accounting estimates.
The Company has not and does not anticipate distributing dividends to stockholders and accordingly
uses a 0% dividend yield assumption for all Black-Scholes calculations. The Company uses an
expected stock-price volatility assumption that is primarily based on historical realized
volatility of the underlying stock during a period of time. For stock option grants made during the
three months ended September 30, 2006, the Company used an expected stock price volatility of 85%.
With regard to the weighted average option life assumption, the Company evaluates the exercise
behavior of past grants as a basis to predict future activity. For stock option grants made during
the three months ended September 30, 2006, the Company used a weighted average expected option life
assumption of 4.5 years. The risk free rate is based on the zero coupon Treasury Strip Yields for
the expected term on the date of grant. For stock option grants made during the three months ended
September 30, 2006, the Company used a weighted average risk
free rate of 4.9%. There were no options granted during the three
months ended October 1, 2005. In the three months
ended September 30, 2006 and October 1, 2005, the Company recorded a total of $1.9 million and $2.9
million of stock-based compensation related expenses, respectively.
Note 4. Comprehensive Loss
For the three months ended September 30, 2006 and October 1, 2005, the Companys comprehensive loss
is comprised of its net loss, the change in the unrealized gain on currency instruments designated as hedges and
foreign currency translation adjustments. The components of comprehensive loss were as follows:
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Three months ended |
|
|
|
September 30, 2006 |
|
|
October 1, 2005 |
|
|
|
(in thousands) |
|
Net loss |
|
$ |
22,890 |
|
|
$ |
535 |
|
Change in unrealized gain on currency instruments designated as hedges |
|
|
217 |
|
|
|
|
|
Currency translation adjustment |
|
|
(3,007 |
) |
|
|
2,136 |
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
20,100 |
|
|
$ |
2,671 |
|
|
|
|
|
|
|
|
7
Note 5. Earnings Per Share
SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per
share on the face of the income statement. Basic earnings per share is computed using only the
weighted average number of common shares outstanding for the period, while diluted earnings per
share is computed assuming conversion of all potentially dilutive securities, such as options,
convertible debt and warrants.
Because the Company incurred a net loss for the three months ended September 30, 2006 and October
1, 2005, the effect of potentially dilutive securities totaling 14,071,349 and 9,716,000 equivalent
shares, respectively, has been excluded from the calculation of diluted net loss per share because
they would have been anti-dilutive.
Note 6. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
July 1, 2006 |
|
|
|
(in thousands) |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
15,715 |
|
|
$ |
17,006 |
|
Work in process |
|
|
22,090 |
|
|
|
20,823 |
|
Finished goods |
|
|
13,807 |
|
|
|
16,031 |
|
|
|
|
|
|
|
|
|
|
$ |
51,612 |
|
|
$ |
53,860 |
|
|
|
|
|
|
|
|
Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
July 1, 2006 |
|
|
|
(in thousands) |
|
Accounts payable accruals |
|
$ |
3,820 |
|
|
$ |
4,497 |
|
Compensation and benefits related accruals |
|
|
5,498 |
|
|
|
5,465 |
|
Warranty accrual |
|
|
3,593 |
|
|
|
3,429 |
|
Other accruals |
|
|
7,224 |
|
|
|
6,763 |
|
Current portion of restructuring accrual |
|
|
10,811 |
|
|
|
12,933 |
|
|
|
|
|
|
|
|
|
|
$ |
30,946 |
|
|
$ |
33,087 |
|
|
|
|
|
|
|
|
Note 8. Assets Held for Resale; Impairment of Long Lived Assets
During the quarter ended September 30, 2006, the Company designated the assets underlying its
Paignton U.K. manufacturing site as held for sale. During the same
quarter, Bookham Technology plc, a wholly-owned subsidiary of the
Company, entered
into an agreement to sell the site to a third party for gross proceeds of £5.0 million
(approximately $9.4 million based on an exchange rate of $1.88
to £1.00), in a transaction expected to
close in November 2006. The agreement has a provision under
which the Company has as option to lease back a portion of the Paignton U.K. facility from the buyer for a two-year term, at a contractual rate which approximates
market rates, which could be terminated at any time by Bookham
Technology plc on
three months notice. During
the quarter ended September 30, 2006, the Company also recorded an impairment charge of $1.9
million, writing down the net book value of the Paignton U.K. property down to the expected net
realizable value as determined based on the terms of the agreement, net of estimated selling
costs.
Note 9. Credit Agreement
On
August 2, 2006, the Borrowers entered into the Credit Agreement with Wells Fargo Foothill, Inc. and other lenders
regarding a three-year $25,000,000 senior secured revolving credit facility. Advances are available
under the Credit Agreement based on 80 percent of
qualified accounts receivable, as defined in the Credit
Agreement, at the time the advance is
requested.
8
The obligations of the Borrowers under the Credit Agreement are guaranteed by the Company,
Onetta, Inc., Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham
(Canada) Inc., Bookham Nominees Limited and Bookham International Ltd., each a wholly-owned
subsidiary of the Company (together, the Guarantors and together with the Borrowers, the
Obligors), and are secured pursuant to a security agreement (the Security Agreement) by the
assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in some of
their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a
security agreement in substantially the same form and join in the Security Agreement.
Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear
interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage
points or the prime rate plus 1.25 percentage points. In the absence of an event of default, any
amounts outstanding under the Credit Agreement may be repaid and borrowed again any time until
maturity on August 2, 2009. A termination of the commitment line any time prior to August 2, 2008
will subject the Borrowers to a prepayment premium of 1.0% of the maximum revolver amount.
The obligations of the Borrowers under the Credit Agreement may be accelerated upon the
occurrence of an event of default under the Credit Agreement, which includes payment defaults,
defaults in the performance of affirmative and negative covenants, the material inaccuracy of
representations or warranties, a cross-default related to other indebtedness in an aggregate amount
of $1,000,000 or more, bankruptcy and insolvency related defaults, defaults relating to such
matters as ERISA, judgments, and a change of control default. The Credit Agreement contains
negative covenants applicable to the Company, the Borrowers and their subsidiaries, including
financial covenants requiring the Borrowers to maintain a minimum level of EBITDA (if the Borrowers
have not maintained specified levels of liquidity), as well as restrictions on liens, capital
expenditures, investments, indebtedness, fundamental changes, dispositions of property, making
certain restricted payments (including restrictions on dividends and stock repurchases), entering
into new lines of business, and transactions with affiliates. As of September 30, 2006, there were
no amounts drawn under the credit facility and the Company is in compliance with all covenants
under the credit facility.
Note 10. Commitments and Contingencies
Guarantees
The Company adopted the provisions of Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and
107 and a rescission of FASB Interpretation No. 34 (FIN 45) effective December 31, 2002. The
Company has the following financial guarantees:
|
|
|
In connection with the sale by New Focus, Inc. of its passive component line to Finisar,
Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property
sold to Finisar. This obligation expires in May 2009 and has no maximum liability. In
connection with the sale by New Focus of its tunable laser technology to Intel Corporation,
New Focus agreed to indemnify Intel against losses for certain intellectual property claims.
This obligation expires in May 2008 and has a maximum liability of $7.0 million. The
Company does not expect to pay out any amounts in respect of these obligations, therefore no
accrual has been made. |
|
|
|
|
The Company indemnifies its directors and certain employees as permitted by law. The
Company has not recorded a liability associated with these obligations as the Company
historically has not incurred any costs associated with such obligations. Costs associated
with such obligations may be mitigated by insurance coverage that the Company maintains. |
|
|
|
|
The Company also has indemnification clauses in various contracts that it enters into in
the normal course of business, such as those issued by its bankers in favor of several of
its suppliers or indemnification in favor of customers in respect of liabilities they may
incur as a result of purchasing the Companys products should such products infringe the
intellectual property rights of a third party. The Company has not historically paid out any
amounts related to these obligations and does not expect to in the future, therefore no
accrual has been made for these obligations. |
Provision for warranties
The Company accrues for the estimated costs to provide warranty services at the time revenue is
recognized. The Companys estimate of costs to service its warranty obligations is based on
historical experience and expectation of future conditions. To the extent the
9
Company experiences increased
warranty claim activity or increased costs associated with servicing
those claims, the Companys warranty costs will increase,
resulting in a decrease to gross profit
and an increase to net loss.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
September 30, 2006 |
|
|
October
1, 2005 |
|
|
|
(in thousands) |
|
Warranty
provision at beginning of
period |
|
$ |
3,429 |
|
|
$ |
3,782 |
|
Warranties issued |
|
|
213 |
|
|
|
159 |
|
Warranties utilized |
|
|
|
|
|
|
(82 |
) |
Warranties expired, and other changes in liability |
|
|
(161 |
) |
|
|
(23 |
) |
Currency translation |
|
|
112 |
|
|
|
(49 |
) |
|
|
|
|
|
|
|
Warranty
provision at end of period |
|
$ |
3,593 |
|
|
$ |
3,787 |
|
|
|
|
|
|
|
|
Litigation
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al.,
Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase
Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter
Defendants, the underwriters in New Focuss initial public offering. Three subsequent lawsuits were
filed containing substantially similar allegations. These complaints have been consolidated. On
April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described below, naming as
defendants the Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and others
in the United States District Court for the Southern District of New York. On April 19, 2002,
plaintiffs filed an Amended Complaint. The Amended Complaint names as defendants Bookham Technology
plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April 2000, and Andrew G. Rickman, Stephen J.
Cockrell and David Simpson, each of whom was an officer and/or director at the time of the initial
public offering.
The Amended Complaint asserts claims under certain provisions of the securities laws of the United
States. It alleges, among other things, that the prospectuses for Bookham Technology plcs and New
Focuss initial public offerings were materially false and misleading in describing the
compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold ordinary shares, in the case of Bookham Technology plc or
common stock, in the case of New Focus), costs, attorneys fees, experts fees, interest and other
expenses. In October 2002, the individual defendants were dismissed, without prejudice, from the
action. In July 2002, all defendants filed Motions to Dismiss the Amended Complaint. The motion was
denied as to Bookham Technology plc and New Focus in February 2003. Special committees of the board
of directors authorized the companies to negotiate a settlement of pending claims substantially
consistent with a memorandum of understanding negotiated among class plaintiffs, all issuer
defendants and their insurers.
Plaintiffs and most of the issuer
defendants and their insurers have entered into a stipulation of
settlement for the claims against the issuer defendants, including the Company. Under the
stipulation of settlement, the plaintiffs will dismiss and release all claims against participating
defendants in exchange for a payment guaranty by the insurance companies collectively responsible
for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the
Court issued an Opinion and Order preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the modification narrowing the scope of
the bar order, and on August 31, 2005, the court issued an order preliminarily approving the
settlement and setting a public hearing on its fairness which took
place on April 24, 2006. The judge has yet to render a decision on the
fairness hearing. The Company believes
that both Bookham Technology, plc and New Focus have meritorious defenses to the claims made in the
Amended Complaint and therefore believes that such claims will not have a material effect on its
financial position, results of operations or cash flows.
Note 11. Restructuring
The following table summarizes
the activity related to the Companys restructuring liability for the three
months ended September 30, 2006:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
costs at |
|
|
restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
|
July 1, |
|
|
costs and |
|
|
Amounts |
|
|
Amounts paid |
|
|
|
|
|
|
costs at |
|
(in thousands) |
|
2006 |
|
|
other |
|
|
reversed |
|
|
or written off |
|
|
Adjustments |
|
|
September 30, 2006 |
|
Lease cancellations and commitments |
|
$ |
11,438 |
|
|
$ |
590 |
|
|
$ |
|
|
|
$ |
(2,215 |
) |
|
$ |
(61 |
) |
|
$ |
9,752 |
|
Termination payments to employees and related
costs |
|
|
4,691 |
|
|
|
2,314 |
|
|
|
(3 |
) |
|
|
(3,563 |
) |
|
|
207 |
|
|
|
3,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual and other |
|
$ |
16,129 |
|
|
$ |
2,904 |
|
|
$ |
(3 |
) |
|
$ |
(5,778 |
) |
|
$ |
146 |
|
|
$ |
13,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued restructuring charges |
|
|
(3,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges included within
other accrued liabilities |
|
$ |
12,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
May and November 2004, the Company announced restructuring
plans, including the transfer of
its assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in
research and development and selling, general and administrative expenses. These cost reduction
efforts were expanded in November 2005 to include the transfer of the Companys chip-on-carrier
assembly from Paignton to Shenzhen, which is expected to be completed in the quarter ended December
30, 2006. In May 2006, the Company announced further cost reduction plans, which included
transitioning all remaining manufacturing support and supply chain management, along with pilot
line production and production planning, from Paignton to Shenzhen,
also expected to be completed in the quarter ended December 31, 2006.
As of September 30, 2006, the Company spent
$26 million on these restructuring plans overall, and in total
anticipates spending approximately $30 million to $37 million, which includes the May 2006
cost reduction plan. The substantial portion of the remaining costs are
severance and retention related, and are being accrued over the remaining service periods of the
employees, and a substantial portion of that remaining amount is
expected to be paid in the quarter ended December 31, 2006. The
Company expects the cost reduction plan announced in May 2006 to reduce its costs by between $5.5
million and $6.5 million in the March 2007 quarter,
when the cost savings are expected to be realized, when compared to the expenses incurred in the quarter ended
April 1, 2006.
In connection with earlier plans of restructuring,
and the assumption of restructuring accruals
upon the acquisition of New Focus in March 2004, in the quarter ended September 30, 2006, the
Company continued to make scheduled payments drawing down the related lease cancellations and
commitments. The Company also accrued an additional $0.6 million for revised estimates related to
one of these commitments. Remaining net payments of lease cancellation and commitments under these
actions are included in the ending restructuring accrual as of September 30, 2006.
Note 12. Segments of an Enterprise and Related Information
The Company is currently organized and operates as two operating segments: optics, and research and
industrial. The optics segment designs, develops, manufactures, markets and sells optical solutions
for telecommunications and industrial applications. The research and industrial segment designs,
develops, manufactures, markets and sells photonic and microwave solutions. The Company evaluates
the performance of its segments and allocates resources based on consolidated revenues and overall
profitability.
Segment information for the three months ended September 30, 2006 and October 1, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
September 30, |
|
|
October 1, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
Optics |
|
$ |
49,211 |
|
|
$ |
56,470 |
|
Research and industrial |
|
|
7,180 |
|
|
|
6,101 |
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
56,391 |
|
|
$ |
62,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss: |
|
|
|
|
|
|
|
|
Optics |
|
$ |
(22,104 |
) |
|
$ |
(542 |
) |
Research and industrial |
|
|
(786 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(22,890 |
) |
|
$ |
(535 |
) |
|
|
|
|
|
|
|
11
Note 13. Significant Related Party Transactions
As of September 30, 2006, Notel Networks
owned 6% of the outstanding common stock of the Company. In the
ordinary course of business, the Company had revenues of $14,629,000 from Nortel Networks in the
three months ended September 30, 2006, and as of September 30, 2006 had accounts receivable, net,
due from Nortel Networks of $4,502,000 and had liabilities due to
Nortel Networks of $4,707,000.
Note 14. Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48 Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model
for recognizing, measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return, including a decision whether to file or not to file
in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15,
2006. If there are changes in net assets as a result of application of FIN 48, these will be
accounted for as an adjustment to retained earnings. The Company is currently assessing the impact
of FIN 48 on its consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 establishes a common definition for fair value to be applied to US GAAP guidance
requiring use of fair value, establishes a framework for measuring fair value, and expands
disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires that employers
recognize on a prospective basis the funded status of their defined benefit pension and other
postretirement plans on their consolidated balance sheet and recognize as a component of other
comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net periodic benefit cost. SFAS No. 158
also requires additional disclosures in the notes to financial statements. SFAS No. 158 is
effective as of the end of fiscal years ending after
December 15, 2006. The implementation of SFAS No. 158 is not
expected to have a material impact on the Companys consolidated financial position or
results of operations.
In September 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1 Accounting for Planned
Major Maintenance Activities (FSP AUG AIR-1). FSP AUG AIR-1 amends the guidance on the accounting
for planned major maintenance activities; specifically it precludes the use of the previously
acceptable accrue in advance method. FSP AUG AIR-1 is effective for fiscal years beginning after
December 15, 2006. The implementation of FSP AUG AIR-1 will not have a material impact on the
Companys consolidated financial position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) 108 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires that public companies utilize a dual-approach to
assessing the quantitative effects of financial misstatements. This dual approach includes both an
income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108
must be applied to annual financial statements for fiscal years ending after November 15, 2006. The
implementation of this standard will not have a material impact on the Companys consolidated
financial position or results of operations.
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and intentions. You can
identify these statements by words such as expect, anticipate, intend, scheduled, plan,
believe, seek, estimate, may, will, continue and similar words. You should read
statements that contain these words carefully. They discuss our future expectations, contain
projections of our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which we have no control.
You should not place undue reliance on forward-looking statements. We cannot guarantee any future
results, levels of activity, performance or achievements. Moreover, we assume no obligation to
update forward-looking statements or update the reasons actual results could differ materially from
those anticipated in forward-looking statements, except as required by law. The factors discussed
in the sections captioned Managements Discussion and Analysis of Financial Condition and Results
of Operations and Risk Factors in this Quarterly Report on
Form 10-Q (including our need for additional funding to continue
as a going concern) and the documents incorporated in it by reference identify important factors that may
cause our actual results to differ materially from the expectations we describe in our
forward-looking statements.
Overview
We design, manufacture and market optical components, modules and subsystems that generate, detect,
amplify, combine and separate light signals principally for use in high-performance fiber optics
communications networks. We principally sell our optical component products to optical systems
vendors as well as to customers in the data communications, military, aerospace, industrial and
manufacturing industries. Customers for our photonics and microwave product portfolio include
academic and governmental research institutions that engage in advanced research and development
activities. Our products typically have a long sales cycle. The period of time between our initial
contact with a customer and the receipt of a purchase order is frequently a year or more. In
addition, many customers perform, and require us to perform, extensive process and product
evaluation and testing of components before entering into purchase arrangements.
We operate in two business segments: (i) optics, and (ii) research and industrial. The optics
segment relates to the design, development, manufacture, marketing and sale of optical solutions
for telecommunications and industrial applications. The research and industrial segment relates
to the design, manufacture, marketing and sale of photonics and microwave solutions.
In our
Annual Report of Form 10-K for the fiscal year ended July 1,
2006, we disclosed that, based on cash balances and our continuing
and expected losses for the foreseeable future, if we fail to meet our
managements current cash flow forecasts, or are unable to draw
sufficient amounts under the three year $25 million senior secured
credit facility we entered into with
Wells Fargo Foothill, Inc., and other lenders in August 2006, for any reason, we will need to raise additional
funding of at least $10 million to $20 million through external sources prior to July 2007 in order
to maintain sufficient financial resources to operate as a going concern through the end of fiscal
2007. We also disclosed that, if necessary, we will attempt to raise additional funds by any
one or combination of the following: (i) completing the sale of certain assets; (ii) issuing
equity, debt or convertible debt; and (iii) selling certain non core businesses, and that there can
be no assurance of our ability to raise sufficient capital through these, or any other
efforts.
Credit Facility
On August 2, 2006, we, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc.,
each a wholly-owned subsidiary, which we collectively refer to as the Borrowers, entered into a
credit agreement, or Credit Agreement, with Wells Fargo Foothill, Inc. and other lenders regarding
a three-year $25,000,000 senior secured revolving credit facility. Advances are available under the
Credit Agreement based on 80% of qualified accounts receivable, as
defined in the Credit Agreement, at the time the advance is requested.
13
Private Placement
On August
31, 2006, we entered into an agreement for a private placement of
common stock and warrants pursuant to which we issued and sold
8,696,000 shares of common stock and warrants to purchase up to
2,174,000 shares of common stock, which sale closed on September 1,
2006, and issued and sold an additional 2,892,667 shares of common stock and warrants
to purchase up to an additional 724,667 shares of common stock in a
second closing on September 19, 2006, in both cases such shares of
common stock and warrants were issued and sold to certain accredited
investors. Our net proceeds from this private placement were $28.8 million. The warrants are exercisable during the period
beginning on March 2, 2007 through September 1, 2011, at an exercise
price of $4.00 a share.
Sale
of Paignton, U.K. Facility
On
September 20, 2006, Bookham Technology plc, our wholly-owned
subsidiary, entered into an agreement to sell its Paignton U.K. manufacturing site for gross process of £5 million
(approximately $9.4 million based on an exchange rate of $1.88
to £1.00), in a transaction scheduled
to close in mid-November 2006. The agreement has a provision
under which we have an option to lease back a
portion of the Paignton, U.K. site from the buyer for a two-year term, which could be terminated at any time by
Bookham Technology plc on three months notice. We plan to move our remaining Paignton research and development
personnel and operations to a smaller site during calendar 2007,
regardless.
Critical Accounting Policies
We believe that several accounting policies are important to understanding our historical and
future performance. We refer to such policies as critical because these specific areas generally
require us to make judgments and estimates about matters that are uncertain at the time we make the
estimate, and different estimateswhich also would have been reasonablecould have been used, which
would have resulted in different financial results.
The critical accounting policies we identified in our Annual Report on Form 10-K for the year ended
July 1, 2006 related to revenue recognition and sales returns, inventory valuation, accounting for
acquisitions and goodwill, impairment of goodwill and other intangible assets, accounting for
acquired in-process research and development and accounting for share-based payments. It is
important that the discussion of our operating results that follows be read in conjunction with the
critical accounting policies discussed in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on September 14, 2006.
14
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109, or FIN 48. FIN 48 prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial statements tax positions taken
or expected to be taken on a tax return, including a decision whether to file or not to file in a
particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If
there are changes in net assets as a result of application of FIN 48, these will be accounted for
as an adjustment to retained earnings. We are currently assessing the impact of FIN 48 on our
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS No. 157.
SFAS No. 157 establishes a common definition for fair value to be applied to generally accepted
accounting principles in the United States guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing
the impact of SFAS No. 157 on our consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, or SFAS No. 158. SFAS No. 158 requires that employers
recognize, on a prospective basis, the funded status of their defined benefit pension and other
postretirement plans on their consolidated balance sheet and recognize as a component of other
comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise
during the period but are not recognized as components of net periodic benefit cost. SFAS No. 158
also requires additional disclosures in the notes to financial statements. SFAS No. 158 is
effective as of the end of fiscal years ending after December 15, 2006. We do not expect the
implementation of SFAS No. 158 to have a material impact on our consolidated financial position or
results of operations.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1 Accounting for Planned Major
Maintenance Activities, or FSP AUG AIR-1. FSP AUG AIR-1 amends the guidance on the accounting for
planned major maintenance activities; specifically it precludes the use of the previously
acceptable accrue in advance method. FSP AUG AIR-1 is effective for fiscal years beginning after
December 15, 2006. We do not expect the implementation of FSP
AUG AIR-1 to have a material impact
on our consolidated financial position or results of operations.
In
September 2006, the SEC staff issued Staff Accounting Bulletin,
No. 108 Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,
or SAB 108. SAB 108 requires that public companies utilize a dual-approach to assessing the
quantitative effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must
be applied to annual financial statements for fiscal years ending after November 15, 2006. We do
not expect the implementation of SAB 108 to have a material impact on our consolidated
financial position or results of operations.
Results of Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
|
Percentage |
$ Millions |
|
2006 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Revenues |
|
$ |
56.4 |
|
|
$ |
62.6 |
|
|
|
(10 |
)% |
Revenues in the three month period ended September 30, 2006 decreased by $6.2 million, or 10%,
compared to revenues in the three month period ended October 1, 2005. The decrease was largely due
to sales to our largest customer, Nortel Networks, decreasing to $14.6 million in the three month
period ended September 30, 2006 from $33.7 million in the three month period ended October 1, 2005.
Revenues from customers other than Nortel Networks increased by $12.9 million between these same
periods.
Pursuant to the second addendum to our Supply Agreement with Nortel Networks, entered into in May
2005, Nortel issued non-cancelable purchase orders, based on revised pricing, totaling
approximately $100 million, for certain products to be delivered through
March 2006, which includes $50
million of products we were discontinuing, referred to as Last-Time Buy products. Our revenues in
the quarter ended September 30, 2006 included $1.7 million of revenues from Last-Time Buy products, as compared
to $14.4 million in the quarter
15
ended October 1, 2005. We expect revenues from Last Time Buy
products will be negligible in future quarters. In January
2006, we entered into a third addendum to the Nortel Supply Agreement, under which Nortel became
obligated to purchase a minimum of $72 million of our products through calendar 2006. We expect
our revenues from Nortel to remain flat or decrease in the quarter
ended December 31, 2006, as compared to the quarter ended
September 30, 2006, and to
decline in future quarters upon the expiration of the supply agreement, although we do expect
Nortel Networks to continue as a major customer for the foreseeable future.
Given improved demand in the telecommunications market, and assuming that our new products,
particularly tunable transmitters and transceivers, are successfully introduced, we expect revenues
with customers other than Nortel to continue to increase through fiscal 2007. Revenues from Cisco
Systems accounted for 13% of our total revenues in the three month period ended September 30,
2006, compared to 11% in the three month period ended October 1, 2005.
Revenues from our research and industrial segment, comprised primarily of our New Focus division,
which designs, manufactures, markets and sells photonic and microwave solutions, increased to $7.2
million in the three month period ended September 30, 2006, compared to $6.1 million in the three
month period ended October 1, 2005, primarily as a result of
increased product sales volumes.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
|
Percentage |
$ Millions |
|
2006 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Cost of revenues |
|
$ |
46.9 |
|
|
$ |
48.2 |
|
|
|
(3 |
)% |
Our cost of revenues consists of the costs associated with manufacturing our products, and includes
the purchase of raw materials, labor costs and related overhead, including stock compensation. It
also includes the costs associated with under-utilized production facilities and resources, as well
as the charges for the write-down of impaired manufacturing assets or restructuring related costs.
Charges for inventory obsolescence, the cost of product returns and warranty costs are also
included in cost of revenues. Costs and expenses of the manufacturing resources which relate to the
development of new products are included in research and development.
Our cost of revenues for the three-month period ended September 30, 2006 decreased 3% from the
corresponding period ended October 1, 2005, primarily due to lower product sales volumes, the lower
cost structure of our current assembly and test operations in Shenzhen, China as compared to the
cost structure for the assembly and test operations formerly
conducted in our
Paignton U.K. facility during the quarter ended October 1, 2005 and the transition of our
Paignton U.K facility from a manufacturing oriented facility to a research and development oriented
facility. Our cost of revenues for the three month periods ended September 30, 2006 and October
1, 2005 included $0.6 million and $0.9 million of stock-based compensation charges,
respectively.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
|
Percentage |
$ Millions |
|
2006 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Gross margin |
|
$ |
9.4 |
|
|
$ |
14.4 |
|
|
|
(34 |
)% |
Gross margin rate |
|
|
17 |
% |
|
|
23 |
% |
|
|
|
|
Gross margin is calculated as revenues less cost of revenues. The gross margin rate is the
resulting gross margin reflected as a percentage of revenues.
Our gross margin rate decreased to 17% in the quarter ended September 30, 2006 compared to 23% in
the quarter ended October 1, 2005, primarily because of
decreased revenues in the quarter ended September 30, 2006 from sales
of products, including Last Time Buy products, which have favorable
pricing terms under the second addendum to the Supply Agreement with
Nortel Networks. During the three month period ended
September 30, 2006, we had negligible revenues from the sale of inventory
we obtained in connection with our 2003 purchase of the optical
components business of Nortel Networks, that had been carried on
our books at zero value. In the three month period ended
16
October 1, 2005, we had revenues
of $4.2 million related to, and recognized profits of
$1.8 million on, inventory that had been
carried on our books at zero value. While this inventory is on our books at zero value, and its
sale generates higher margins than most
of our new products, we incur additional costs to complete the manufacturing of these products
prior to sale. We believe revenues from this zero value inventory will continue to be negligible
through the remainder of fiscal 2007.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
|
Percentage |
$ Millions |
|
2006 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Research and Development Expenses |
|
$ |
11.5 |
|
|
$ |
10.4 |
|
|
|
10 |
% |
% of net revenues |
|
|
20 |
% |
|
|
17 |
% |
|
|
n/a |
|
Research and development expense consists primarily of salaries and related costs of employees
engaged in research and design activities, including stock compensation charges related to those
employees, costs of design tools and computer hardware, and costs related to prototyping.
Research
and development expenses increased to $11.5 million in the three month period ended
September 30, 2006 from $10.4 million in the three month period ended October 1, 2005. This
increase is primarily related to the costs of new product
introduction efforts undertaken in
the three month period ended September 20, 2006, as well as the classification of additional costs
as research and development in connection with a change in the profile of our Paignton U.K site
from primarily an assembly and test site, to primarily a research and development site. The three
months ended September 30, 2006 also included $0.5 million of stock compensation charges, compared
to $0.7 million in the three months ended October 1, 2005.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
|
Percentage |
$ Millions |
|
2006 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Selling, General and Administrative Expenses |
|
$ |
12.9 |
|
|
$ |
13.2 |
|
|
|
(2 |
)% |
% of net revenues |
|
|
23 |
% |
|
|
21 |
% |
|
|
|
|
Selling, general and administrative expenses consist primarily of personnel-related expenses,
including stock compensation charges related to employees engaged in sales, general and
administrative functions, legal and professional fees, facilities expenses, insurance expenses and
certain information technology costs.
Selling, general and administrative expenses decreased to $12.9 million in the three month period
ended September 30, 2006 from $13.2 million in the three
month period ended October 1, 2005, primarily as a result of a $0.5 million decrease in stock compensation included in selling, general
and administrative expenses to $0.9 million in the three month
period ended September 30, 2006 as compared to $1.4 million in the
three month period ended October 1, 2005.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
|
Percentage |
$ Millions |
|
2006 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Amortization of Intangible Assets |
|
$ |
2.3 |
|
|
$ |
2.7 |
|
|
|
(16 |
)% |
Since 2001, we have acquired six optical components companies and businesses, and one photonics and
microwave company, which has added to the balances of our purchased intangible assets subject to
amortization. We did not complete any business combinations in the three months ended September 30,
2006, and certain purchased intangible assets from our earliest business acquisitions became
17
fully
amortized, which has caused our expense for amortization of purchased intangible assets to decrease
in the quarter ended September 30, 2006 as compared to the same quarter in the prior year.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
|
September 30, |
|
|
October 1, |
|
$ Millions |
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Lease cancellation and commitments |
|
$ |
0.6 |
|
|
$ |
0.1 |
|
Termination payments to employees and related costs |
|
|
2.3 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
$ |
2.9 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
In
May and November 2004, we announced restructuring plans
including the transfer of our
assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in
research and development and selling, general and administrative expenses. These cost reduction
efforts were expanded in November 2005 to include the transfer of our chip-on-carrier assembly from
Paignton to Shenzhen, which is expected to be completed in the quarter ended December 30, 2006.
In May 2006, we announced further cost reduction plans, which included transitioning all remaining
manufacturing support and supply chain management, along with pilot line production and production
planning, from Paignton to Shenzhen, also expected to be completed in
the quarter ended
December 31, 2006.
As of
September 30, 2006, we have spent $26.0 million on these
restructuring plans, and, in total,
we anticipate spending approximately $30 million to $37 million, which includes the May 2006
cost reduction plan. The substantial portion of the remaining costs are
severance and retention related, and are being accrued over the remaining service periods of the
employees, and a substantial portion of that remaining amount is
expected to be paid in the quarter ended December 31, 2006. We
expect the cost reduction plan announced in May 2006 to reduce our costs by between $5.5 million
and $6.5 million in the March 2007 quarter, when the
cost savings are expected to be realized, when compared to the expenses incurred in the quarter ended April 1,
2006.
In
connection with earlier plans of restructuring, and the assumption of
restructuring accruals upon the acquisition of New Focus in March
2004, in the quarter ended September 30, 2006 we continued to make
scheduled payments drawing down the related lease cancellations and
commitments. We also accrued an additional $0.6 million for revised
estimates related to one of these commitments. Remaining net payments
of lease cancellation and commitments under these actions are
included in the ending restructuring accrual as of September 30,
2006.
Legal Settlement
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
$ Millions |
|
2006 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
Legal settlement |
|
$ |
0.5 |
|
|
$ |
|
|
In the three month period ended September 30, 2006 we recorded $0.5 million for additional
legal fees and other professional costs related to a settlement of
the litigation with Howard Yue, the former sole shareholder of
Globe Y. Technology, Inc. (a company acquired by New Focus, Inc. in
February 2001), which was reached in fiscal
year 2006. There were no legal settlements, or related legal fees and professional costs, recorded in
the corresponding quarter of the prior year.
Impairment/(Recovery) of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
September 30, |
|
October 1, |
$ Millions |
|
2006 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
Impairment/(recovery) of long-lived assets |
|
$ |
1.9 |
|
|
$ |
(1.3 |
) |
In the quarter ended September 30, 2006, we entered into a definitive agreement to sell our
facility in Paignton, U.K. for gross proceeds of £5 million (approximately $9.4 million based on an
exchange rate of $1.88 to £1.00). This transaction is expected to close in mid-November 2006. In
connection with this transaction, we recorded an impairment charge of $1.9 million in the three
month period ended September 30, 2006, to write down the net book value of related assets to their
net realizable value based on the sale price net of estimated selling costs.
In the quarter ended October 1, 2005, we sold a parcel of land in Swindon, U.K., which had
previously been accounted for as held for sale. The proceeds were $15.5 million, resulting in a
recovery of previous impairment of $1.3 million, net of transaction costs. The
18
book value of this
land had previously been impaired and written-down to fair market value, and therefore the net gain
is being reflected as a recovery of this impairment.
Other Income/(Expense), Net
|
|
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
September 30, |
|
October 1, |
$ Millions |
|
2006 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
Other income/(expense),net |
|
$ |
(1.5 |
) |
|
$ |
(0.9 |
) |
Other income/(expense), net primarily consists of interest expense, interest income and foreign
currency gains and losses primarily related to the remeasurement of short term balances between our
international subsidiaries, the remeasurement of United States dollar denominated cash and receivable
accounts of foreign subsidiaries with local functional currencies and unrealized gains or losses
on forward contracts not designated as hedges. The increase in other income/(expense), net in the
quarter ended September 30, 2006 was primarily related to the remeasurement of short term balances
between certain of our international subsidiaries.
Income
Tax Benefit/(Provision)
In the quarter ended October 1, 2005, we recorded a one time tax gain of $11.8 million related to
our anticipated use of capital allowance carry forwards to offset deferred tax liabilities assumed
upon our acquisition of Creekside in August 2005.
Liquidity, Capital Resources and Contractual Obligations
Liquidity and Capital Resources
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
|
September 30, |
|
|
October 1, |
|
$ Millions |
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Net loss |
|
$ |
(22.9 |
) |
|
$ |
(0.5 |
) |
Non-cash
accounting items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6.5 |
|
|
|
7.7 |
|
Impairment/(recovery) of long-lived assets |
|
|
1.9 |
|
|
|
(1.3 |
) |
Stock-based compensation |
|
|
1.9 |
|
|
|
2.9 |
|
Unrealized gain on foreign currency contracts |
|
|
|
|
|
|
(0.7 |
) |
One time tax gain |
|
|
|
|
|
|
(11.8 |
) |
Losses on currency re-measurement of notes payable |
|
|
|
|
|
|
0.4 |
|
Amortization of deferred gain on sale leaseback |
|
|
(0.3 |
) |
|
|
|
|
Amortization of interest expense for warrants and beneficial conversion feature |
|
|
|
|
|
|
0.7 |
|
Gain on sale
of property and equipment |
|
|
(1.1 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
Total
non-cash accounting items |
|
|
8.9 |
|
|
|
(3.0 |
) |
Changes in
operating assets and liabilities, net |
|
|
0.1 |
|
|
|
(7.4 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(13.9 |
) |
|
$ |
(10.9 |
) |
|
|
|
|
|
|
|
19
Operating activities
Net cash used in operating activities for the three month period ended September 1, 2006 was $13.9
million, of which $14.0 million was due to our net loss for the period adjusted for non-cash
accounting items. The remaining $0.1 million was due to the net
change in our operating assets and liabilities,
which arose primarily from cash generated from reductions in accounts receivable, in inventories, related to
inventories at our Paignton U.K. site as operations have
moved to Shenzhen, China, and in
prepaid and other assets, to a degree offset by decreases in accounts payable and accrued expenses
and other liabilities, including the payment of professional fees
and accrued
restructuring costs.
Net cash used in operating activities for the three month period ended October 1, 2005 was $10.9
million, of which $3.5 million was due to our net loss for the period adjusted for non-cash
accounting items. The remaining $7.4 million was due to the net
change in our operating assets and liabilities,
which arose primarily from increases in accounts receivable, in part related to our higher revenues
in the quarter, and increases in inventories related to ramping up our Shenzhen manufacturing
facility while still operating our Paignton facility.
Investing activities
Investing activities used cash of $1.5 million in the quarter ended September 30, 2006, primarily
consisting of $2.3 million in capital expenditures and $0.6 million of cash transferred to
restricted cash, offset by $1.5 million in proceeds from the sale of fixed assets. Investing
activities generated net cash of $7.8 million in quarter ended October 1, 2005, primarily as a
result of assuming net cash of $7.8 million in connection with our
acquisition of Creekside in August 2005.
On August 10, 2005, Bookham Technology plc, our wholly owned subsidiary,
entered into a share purchase agreement pursuant to which Bookham Technology plc
purchased all of the issued share capital of City Leasing (Creekside) Limited, a subsidiary
of Deutsche Bank, for consideration of £1.00, plus professional fees of approximately
£455,000 (approximately $837,000, based on an exchange rate of
£1.00 to $1.8403). The
parties to the share purchase agreement are Bookham Technology plc, Deutsche Bank
and London Industrial Leasing Limited, a subsidiary of Deutsche Bank, which we refer to
as London Industrial. Creekside was utilized by Deutsche Bank in connection with the
leasing of four aircraft to a third party. The leasing arrangement is structured as follows:
Phoebus Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as Phoebus,
leases the four aircraft to Creekside under the primary leases and Creekside in turn subleases
the aircraft to a third party. Under the sub-lease arrangement, the third party lessee
who utilizes the aircraft, whom we refer to as the Sub-Lessee, makes sublease payments
to Creekside, who in turn must make lease payments to Phoebus under the primary
leases. To insulate Creekside from any risk that the Sub-Lessee will fail to make
payments under the sub-lease arrangement, prior to the execution of the share purchase
agreement, Creekside assigned its interest in the Sub-Lessee payments to Deutsche Bank
in return for predetermined deferred consideration amounts, which we refer to as
the Deferred Consideration, which are paid directly from Deutsche Bank. Additionally, on
closing the transaction, Deutsche Bank loaned Creekside funds to (i) pay substantially all
of the rentals under the primary lease with Phoebus, excluding an amount equal to
£400,000 (approximately $736,000), and (ii) repay an existing loan made by another
wholly owned subsidiary of Deutsche Bank to Creekside. The obligation of Creekside to
repay the Deutsche Bank loans may be fully offset against the obligation of Deutsche
Bank to pay the Deferred Consideration to Creekside.
As a result of these transactions, Bookham Technology plc will have available
through Creekside cash of approximately £6.63 million (approximately $12.2 million,
based on an exchange rate of £1.00 to $1.8403). Under the terms of the agreement,
Bookham Technology plc received £4.2 million (approximately $7.5 million) of available
cash when the transaction closed on August 10, 2005. An additional £1 million
(approximately $1.8 million) has since been received on October 14, 2005, £1 million
(approximately $1.8 million) was received on July 14, 2006 and the balance of
approximately £431,000 (approximately $793,000) is expected to be available on July 16,
2007.
At the closing of this transaction, Creekside had receivables (including services and
interest charges) of £73.8 million (approximately $135.8 million) due from Deutsche
Bank in connection with certain aircraft subleases of Creekside and cash of £4.7 million
(approximately $8.6 million), of which £4.2 million was immediately available. The
assignment was made in exchange for the receivables, which are to be paid by Deutsche
Bank to Creekside in three installments, with the last payment being made on July 16,
2007. We have recorded these receivables and payables as net assets on our balance sheet
as of September 1, 2006, which is included elsewhere in this Quarterly Report on Form 10-Q.
Creekside and Deutsche Bank entered into two facility agreements relating to a loan
in the principal amount of £18.3 million (approximately $33.7 million) and a loan in the
principal amount of £42.5 million including interest (approximately $78.2 million),
which together will accrue approximately £3.6 million (approximately $6.6 million) in
interest during the term of these loans. At the closing, Creekside used the loans to repay
amounts outstanding under a loan dated April 12, 2005 between Creekside, as borrower,
and City Leasing (Donside) Limited, a subsidiary of Deutsche Bank, as lender, and to pay
part of Creeksides rental obligations under the lease agreements.
At August 10, 2005, Creekside had long-term liabilities to Deutsche Bank under the
loans, an agreement to pay Deutsche Bank £8.3 million (approximately $15.3 million,
including principal and interest) to cover settlement of current Creekside tax liabilities
and £0.4 million (approximately $0.7 million) of outstanding payments due to Deutsche
Bank under the lease agreements; we refer to these collectively as the Obligations.
Creekside will use the Deferred Consideration to pay off the Obligations over a
period of two years, or the Term, such that the Obligations will be offset in full by the
receivables and we expect will result in Bookham Technology plc having excess cash of approximately
£6.63 million (approximately $12.2 million) available to it during the Term. Bookham
Technology plc expects to surrender certain of its tax losses against any U.K. taxable
income that may arise as a result of the Deferred Consideration, to reduce any U.K. taxes
that would otherwise be due from Creekside.
The loans issued by Deutsche Bank may be prepaid in whole at any time with
30 days prior written notice to Deutsche Bank. The loan for £18.3 million plus interest
was repaid by Creekside on October 14, 2005, and the loan for £42.5 million is repayable
by Creekside in installments: the first installment of £23.5 million (approximately
$43.2 million) was paid on July 14, 2006; and the second installment of £22.5 million
(approximately $41.4 million) is payable on July 16, 2007. The remaining loan accrues
interest a rate of 5.68% per year. Events of default under the loan include failure by
Creekside to pay amounts under the loans when due, material breach by Creekside of the
terms of the lease agreements and related documentation, a judgment or order made
against Creekside that is not stayed or complied with within seven days or an attachment
by creditors that is not discharged within seven days, insolvency of Creekside or failure
by Creekside to make payments with respect to all or any class of its debts, presentation
of a petition for the winding up of Creekside, and appointment of any administrative or
other receiver with respect to Creekside or any material part of Creeksides assets. While
Deutsche Bank may accelerate repayment under the facility agreements upon an event of
default, the loan will be fully offset against the receivables, as described above.
Pursuant to the terms of the agreements governing this transaction, we believe that
we have not assumed any material credit risk in connection with these arrangements. The
material cash flow obligations associated with Creekside are directly related to Deutsche
Banks obligations to pay Creekside the Deferred Consideration, and Creeksides
obligation to repay the loans to Deutsche Bank. The obligations of Creekside to repay the
Deutsche Bank loan can be fully offset against Deutsche Banks obligation to pay the
Deferred Consideration. Any Sub-Lessee default has no impact on Deutsche Banks
obligation to pay Creekside the Deferred Consideration. Regarding the primary leases
between Phoebus and Creekside, all but £400,000 has been paid. For these reasons, we
believe we do not bear a material risk and have no substantial continuing payments or
obligations.
Under the
Creekside share purchase agreement and related documents, London Industrial and
Deutsche Bank have indemnified us, Bookham Technology plc and Creekside with
respect to contractual obligations and liabilities entered into by Creekside prior to the
closing of the transaction and certain tax liabilities of Creekside that may arise in taxable
periods both prior to and after the closing.
Pursuant to an administration agreement between Creekside, City Leasing Limited, a
subsidiary of Deutsche Bank, and Deutsche Bank, Creekside is to be administered during
the Term by City Leasing Limited to ensure Creekside complies with its obligations
under the lease agreements.
In accordance with the terms of the primary leases and the sub-leases, Phoebus is
ultimately entitled to the four aircraft in the event of default by the Sub-Lessee. An event
of default will not impact the payment obligations described above.
20
Financing activities
On August 31, 2006, we entered into an agreement for a private placement of common
stock and warrants pursuant to which we issued and sold 8,696,000 shares of common
stock and warrants to purchase up to 2,174,000 shares of common stock, which sale
closed on September 1, 2006, and issued and sold an additional 2,892,667 shares of common stock and
warrants to purchase up to an additional 724,667 shares of common stock in a second
closing on September 19, 2006, in both cases such shares of common stock and warrants
were issued and sold to certain accredited investors. Our net proceeds from this private
placement were a total of $28.8 million. The warrants are exercisable during the period
beginning on March 2, 2007 through September 1, 2011, at an exercise price of $4.00 a
share.
In the quarter ended October 1, 2005, we generated $14.7 million, net of costs, from the sale of a
parcel of land in Swindon UK.
Sources of Cash
In the past five years, we have funded our operations from several sources, including through
public offerings of equity, issuance of debt and convertible debt, sale of assets and net cash from
acquisitions.
On August 31, 2006, we entered into an agreement for a private placement of common
stock and warrants pursuant to which we issued and sold 8,696,000 shares of common
stock and warrants to purchase up to 2,174,000 shares of common stock, which sale
closed on September 1, 2006, and issued and sold an additional 2,892,667 shares of common stock and
warrants to purchase up to an additional 724,667 shares of common stock in a second
closing on September 19, 2006, in both cases such shares of common stock and warrants
were issued and sold to certain accredited investors. Our net proceeds from this private
placement were a total of $28.8 million. The warrants are exercisable during the period
beginning on March 2, 2007 through September 1, 2011, at an exercise price of $4.00 a
share.
On August 2, 2006, we, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc., each a
wholly-owned subsidiary, which we collectively refer to as the Borrowers, entered into a credit
agreement, or Credit Agreement, with Wells Fargo Foothill, Inc. and other lenders regarding a
three-year $25 million senior secured revolving credit facility. Advances are available under the
Credit Agreement based on 80 percent of qualified accounts
receivable, as defined in the Credit Agreement, at the time the
advance is requested.
The obligations of the Borrowers under the Credit Agreement are guaranteed by us, Onetta,
Inc., Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc.,
Bookham Nominees Limited and Bookham International Ltd., each also a wholly-owned subsidiary,
(which we refer to collectively as the Guarantors and together with the Borrowers, as the
Obligors), and are secured pursuant to a security agreement, or the Security Agreement, by the
assets of the Obligors, including a pledge of the capital stock holdings of the Obligors in some of
their direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a
security agreement in substantially the same form and join in the Security Agreement.
Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear
interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage
points or the prime rate plus 1.25 percentage points. In the absence of an event of default, any
amounts outstanding under the Credit Agreement may be repaid and reborrowed anytime until maturity
on August 2, 2009. A termination of the commitment line any time prior to August 2, 2008 will
subject the Borrowers to a prepayment premium of 1.0% of the maximum revolver amount.
The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence
of an event of default under the Credit Agreement, which includes payment defaults, defaults in the performance of affirmative and negative covenants, the
material inaccuracy of representations or warranties, a cross-default related
to other indebtedness in an
aggregate amount of $1,000,000 or more, bankruptcy and insolvency related defaults, defaults
relating to such matters as ERISA, judgments, and a change of control default. The Credit Agreement
contains negative covenants applicable to the Borrowers and their subsidiaries, including financial
covenants requiring the Borrowers to maintain a minimum level of EBITDA (if the Borrowers have not
maintained specified levels of liquidity), as well as restrictions on liens, capital expenditures,
investments, indebtedness, fundamental changes,
21
dispositions of property, making certain restricted payments (including
restrictions on dividends and stock repurchases), entering into new lines of business, and
transactions with affiliates.
In connection with the Credit Agreement, we agreed to pay a monthly servicing fee of $3,000
and an unused line fee equal to 0.375% per annum, payable monthly on the unused amount of revolving
credit commitments. To the extent there are letters of credit outstanding under the Credit
Agreement, the Borrowers will pay to the administrative agent a letter of credit fee at a rate
equal to 2.75% per annum. As of September 30, 2006, there were no amounts drawn under the credit
facility and we were in compliance with all covenants under the credit facility.
On
September 20, 2006, Bookham Technology plc, our wholly-owned subsidiary, entered into an
agreement to sell its Paignton U.K. manufacturing site for gross process of £5 million
(approximately $9.4 million based on an exchange rate of $1.88
to £1.00), in a transaction scheduled
to close in mid-November 2006. The agreement has a provision
under which we have an option to lease back a
portion of the site from the buyer for a two-year term, at a contractual rate which approximates
market rates, which could be terminated at any time by Bookham
Technology plc on three months notice. We plan
to move our remaining Paignton research and development personnel and
operations to a smaller site
during calendar 2007, regardless.
Future Cash Requirements
In our
Annual Report of Form 10-K for the fiscal year ended July 1,
2006, we
disclosed that, based on our cash balances and our continuing and expected
losses for the foreseeable future, if we fail to meet our
managements current cash flow forecasts, or are unable to draw
sufficient amounts under the credit agreement for any reason, we will need to raise additional
funding of at least $10 million to $20 million through external sources prior to July 2007 in order
to maintain sufficient financial resources to operate as a going concern through the end of fiscal
2007. We also disclosed that if necessary we will attempt to raise additional funds by any
one or a combination of the following: (i) completing the sale of certain assets; (ii) issuing
equity, debt or convertible debt; and (iii) selling certain non core businesses, and that there can
be no assurance of our ability to raise sufficient capital through these, or any other
efforts.
Since
the filing of our Annual Report on Form 10-K we raised approximately $7.8 million in gross proceeds from the second
closing of our private placement of shares of our common stock and
warrants to purchase shares of common stock and entered into an agreement to sell
our Paignton U.K. site for approximately $9.4 million in gross proceeds in a transaction expected
to close in mid-November 2006. There can be no assurance that we
will close the sale of the Paignton U.K. site, or that we will not need to raise additional
funds in order to continue as a going concern, or
that we will be able to raise any such capital through the
above, or any other efforts.
Risk ManagementForeign Currency Risk
We are exposed to fluctuations in foreign currency exchange rates and interest rates. As our
business has grown and become increasing multinational in scope, we have become increasingly
subject to fluctuations based upon changes in the exchange rates between the currencies in which we
collect revenues and pay expenses. Despite our change in domicile from the United Kingdom to the
United States, in the future we expect that a substantial portion of our revenues will be
denominated in U.S. dollars, while a substantial portion of our expenses will continue to be
denominated in U.K. pounds sterling. Fluctuations in the exchange rate between the U.S. dollar and
the U.K. pound sterling and, to a lesser extent, other currencies in which we collect revenues and
pay expenses, could affect our operating results. This includes the Chinese Yuan, now that our
Shenzhen, China facility is fully operational, in which we pay local expenses. To the extent the
exchange rate between the U.S. dollar and the Chinese Yuan were to begin to fluctuate more
significantly than experienced to date, our results of operations
could be adversely impacted. We enter into foreign currency forward exchange contracts in an effort to
mitigate our exposure to such fluctuations between the U.S. dollar and the U.K. pound sterling, and
we may be required to convert currencies to meet our obligations. Under certain circumstances,
foreign currency forward exchange contracts can have an adverse effect on our financial condition.
As of September 30, 2006, we held nine foreign currency forward exchange contracts with a nominal
value of $19.5 million which include put and call options which expire, or expired, at various
dates from October 2006 to June 2007. As of September 30, 2006, the fair value of our outstanding
foreign
22
currency
forward exchange contracts was an asset of $0.4 million and we
recorded an unrealized
loss of $0.2 million during the quarter to other comprehensive income in connection with marking these contracts to
fair value.
Contractual Obligations
There have been no material changes to the contractual obligations disclosed as at July 1, 2006 in
our Annual Report on Form 10-K filed with the SEC on September 14, 2006.
Off-Balance Sheet Arrangements
We are not currently party to any material off-balance sheet arrangements.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates
We finance our operations through a mixture of stockholders funds, loan notes, finance leases
and working capital. In the three month period ended September 30, 2006, we entered into a $25
million revolving credit line facility with Wells Fargo Foothill. During the three months ended
September 30, 2006, we did not drawdown on this facility and therefore had no exposure to interest
rate fluctuations, other than exposure created by our cash deposits. We monitor our interest rate
risk on cash balances primarily through cash flow forecasting. Cash that is surplus to immediate
requirements is invested in short-term deposits with banks accessible with one days notice and
invested in overnight money market accounts.
Foreign currency
Due to our multinational operations, we are subject to fluctuations based upon changes in the
exchange rates between the currencies in which we collect revenue and pay expenses. Our expenses
are not necessarily incurred in the currency in which revenue is generated, and, as a result, we
may from time to time have to exchange currency to meet our obligations. These currency conversions
are subject to exchange rate fluctuations, in particular, changes in the value of the U.K. pound
sterling compared to the U.S. dollar. In an effort to mitigate exposure to those fluctuations, we
enter into foreign currency forward exchange contracts with respect to portions of our forecasted
expenses denominated in U.K. pound sterling. At September 30, 2006, we held nine foreign currency
forward exchange contracts, including put and call options, to purchase U.K. pound sterling with a
nominal value of $19.5 million and a fair value of $19.9 million at September 30, 2006, including
our recording of an unrealized gain of $0.4 million at that date. These contracts include put and
call options which expire, or expired, on dates ranging from October 2006 to June 2007. It is
estimated that a 10% fluctuation in the dollar between September 30 , 2006 and the maturity dates
of the put and call instruments underlying the contracts would lead to a profit of $2.3 million
(dollar weakening), or loss of $1.6 million (dollar strengthening) on our outstanding foreign
currency forward exchange contracts, should they be held to maturity.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2006. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the
companys management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
In our Annual Report on Form 10-K for the year ended July 1, 2006, we identified a material
weakness in our systems of internal control over financial reporting related to the inconsistent
treatment of translation/transaction gains and losses in respect to certain intercompany loan
balances. Although we believe we have implemented adequate review procedures to remedy this
material weakness, we also believe these changes need to be in place and functioning for two
quarters prior to being deemed fully integrated into our systems of internal control over financial
reporting. Accordingly, based on the evaluation of our disclosure controls and procedures as of
September 30, 1006, our chief executive officer and chief financial officer concluded that as of
such date, our disclosure controls and procedures were not effective at the reasonable assurance
level. Based on current circumstances, however, we believe we will be in a position to report
favorably on the final remediation of this condition in our Form 10-Q for the quarter ended
December 30, 2006.
24
Except as noted above, there was no change in our internal control over financial reporting during
the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et
al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase
Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter
Defendants, the underwriters in New Focuss initial public offering. Three subsequent lawsuits were
filed containing substantially similar allegations. These complaints have been consolidated. On
April 19, 2002, plaintiffs filed an amended class action complaint, described below, naming as
defendants the Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a class action complaint was filed against Bookham Technology plc
and others in the United States District Court for the Southern District of New York. On April 19,
2002, plaintiffs filed an Amended Complaint or, the Amended Complaint. The Amended Complaint names
as defendants Bookham Technology plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens,
Inc., two of the underwriters of Bookham Technology plcs initial public offering in April 2000,
and Andrew G. Rickman, Stephen J. Cockrell and David Simpson, each of whom was an officer and/or
director at the time of Bookham Technology plcs initial public offering.
The Amended Complaint asserts claims under certain provisions of the securities laws of
the United States. It alleges, among other things, that the prospectuses for Bookham Technology
plcs and New Focuss initial public offerings were materially false and misleading in describing
the compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold our or New Focus common stock), costs, attorneys fees,
experts fees, interest and other expenses. In October 2002, the individual defendants were
dismissed, without prejudice, from the action. In July 2002, all defendants filed motions to
dismiss the Amended Complaint. The motion was denied as to Bookham Technology plc and New Focus in
February 2003. Special committees of the board of directors authorized the companies to negotiate a
settlement of pending claims substantially consistent with a memorandum of understanding negotiated
among class plaintiffs, all issuer defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a
stipulation of settlement for the claims against the issuer defendants, including us. Under the
stipulation of settlement, the plaintiffs will dismiss and release all claims against participating
defendants in exchange for a payment guaranty by the insurance companies collectively responsible
for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the
court issued an Opinion and Order preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the modification narrowing the scope of
the bar order, and on August 31, 2005, the court issued an order preliminarily approving the
settlement and setting a public hearing on its fairness which took place on April 24, 2006. The
judge has yet to enter a decision on this hearing. We believe that both Bookham Technology plc and
New Focus have meritorious defenses to the claims made in the Amended Complaint and therefore
believes that such claims will not have a material effect on our financial position, results of
operations or cash flows.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. You should carefully consider the
risks and uncertainties described below in addition to the other
information included or incorporated by reference in this Quarterly
Report on Form 10-Q if any of the following risks
actually occur, our business, financial condition or results of operations would likely suffer. In
that case, the trading price of our common stock could fall.
25
We have a history of large operating losses and we expect to generate losses in the
future unless we achieve further cost reductions and revenue increases.
We have never been profitable. We have incurred losses and negative cash flow from
operations since our inception. As of September 30, 2006, we had an accumulated deficit of $977
million.
Our
net loss for the three month period ended September 30, 2006 was $22.9 million. Our
net loss for the year ended July 1, 2006 was $87.5 million, which included an $18.8 million loss on
conversion of convertible debt and early extinguishment of debt, a $11.7 million tax gain, and an
aggregate of $11.2 million of restructuring charges. For the year ended July 2, 2005, our net loss
was $248 million, which included goodwill and intangibles impairment charges of $114.2 million and
restructuring charges of $20.9 million.
Even though we generated positive gross margins in each of the past seven fiscal
quarters, we have a history of negative gross margins. In addition, in the quarter ended April 1,
2006, we experienced a decrease in margins when compared with the prior fiscal quarter, which was
the result of a shift to lower margin products as we transition to new products, underutilization
of our semiconductor facility located in Caswell, U.K. as a result of the changing product mix, and
costs associated with the shutdown of certain production lines in our Paignton assembly and test
facility. We may not be able to maintain positive gross margins if similar issues arise, or if we
do not continue to reduce our costs, improve our product mix and generate sufficient revenues from
new and existing customers to offset the revenues we may lose after Nortel Networks completes its
purchases pursuant to the supply agreement, as amended.
We remain highly dependent on sales to Nortel Networks and we expect revenues from Nortel
Networks to decrease into calendar 2007.
Historically,
Nortel Networks has been our largest customer, and it owns 6% of our outstanding common stock. In the three month period
ended September 30, 2006, our revenues from Nortel Networks were $14.6 million, or 26% of our
total revenues. In the fiscal year ended July 1, 2006 and in the fiscal year ended July 2, 2005,
we sold $110.5 million and $89.5 million of products and services to Nortel Networks, or 48% and
45% of our total revenues, respectively.
In connection with the third addendum to the supply agreement with Nortel Networks we
entered into on January 13, 2006, Nortel Networks is obligated to purchase $72 million of our
products through calendar year 2006. Nortel Networks may not continue to buy any of our products
after the supply agreement, as amended, is completed. We expect revenues from Nortel to decrease
into calendar 2007, and to the extent Nortel Networks does not continue to buy at recent levels, we
may not be able to replace the loss of revenue from Nortel Networks with revenue from other
customers. To the extent that we may rely on Nortel Networks for revenues in the future, Nortel
Networks has experienced significant losses in the past and any future adverse change in Nortel
Networks financial condition could adversely affect its demand for our products.
Our success will depend on our ability to anticipate and respond to evolving
technologies and customer requirements.
The market for telecommunications equipment is characterized by substantial capital
investment and diverse and evolving technologies. For example, the market for optical components is
currently characterized by a trend toward the adoption of pluggable components and tunable
transmitters that do not require the customized interconnections of traditional fixed wave length
gold box devices and the increased integration of components on subsystems. Our ability to
anticipate and respond to these and other changes in technology, industry standards, customer
requirements and product offerings and to develop and introduce new and enhanced products will be
significant factors in our ability to succeed. We expect that new technologies will continue to
emerge as competition in the telecommunications industry increases and the need for higher and more
cost efficient bandwidth expands. The introduction of new products embodying new technologies or
the emergence of new industry standards could render our existing products uncompetitive from a
pricing standpoint, obsolete or unmarketable.
We may encounter unexpected costs or delays in transferring our assembly and test
operations from the United Kingdom to Shenzhen, China.
26
A key element of our restructuring and cost reduction efforts is the successful transfer
of substantially all of our assembly and test operations from Paignton, U.K. to Shenzhen, China.
Accordingly, we expect that our ability to transfer manufacturing capabilities to, and to operate
effectively in, China is critical to the overall success of our business. We began to implement the
transfer of our assembly and test operations from Paignton to Shenzhen in the fall of 2004. The
substantial portion of the manufacturing transfer has been completed as of July 1, 2006. In
November 2005, we announced that our chip-on-carrier assembly will also be transferred from
Paignton to Shenzhen. We expect that the transfer of chip-on-carrier assembly operation to Shenzhen
will continue at least into the quarter ending December 31, 2006. In May 2006, we announced that
substantially all remaining manufacturing and supply chain management and related activities in
Paignton would also be transferred to Shenzhen, and that transfer will continue into the quarter
ended March 31, 2007. Our business and results of operations would be materially adversely affected
if we experience delays in, increased costs related to, or if we are ultimately unable to:
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qualify our manufacturing lines and the products we produce in Shenzhen, as required by our customers; |
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transfer our assembly and test equipment, including chip-on-carrier equipment, from Paignton to
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attract qualified personnel to operate our Shenzhen facility; |
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retain employees at our Shenzhen facility; |
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achieve the requisite production levels for products manufactured at our Shenzhen facility; or |
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wind down operations at our Paignton facility. |
During the year ended July 1, 2006, we incurred significant unanticipated costs related
to the wind-down of manufacturing activities in Paignton, and the transfer of the related
activities to Shenzhen, and we may continue to do so in the future. If we continue to incur these
unanticipated costs in connection with transferring certain operations to our Shenzhen facility,
our business and results of operations will be adversely affected.
The market for optical components continues to be characterized by excess capacity and
intense price competition which has had, and will continue to have, a material adverse affect on
our results of operations.
In 2002, actual demand for optical communications equipment and components was
dramatically less than that forecasted by leading market researchers only two years before. Even
though the market for optical components has been recovering recently, particularly in the metro
market segment, there continues to be excess capacity, intense price competition among optical
component manufacturers and continued consolidation of the industry. As a result of this excess
capacity, and other industry factors, pricing pressure remains intense. The continued uncertainties
in the telecommunications industry and the global economy make it difficult for us to anticipate
revenue levels and therefore to make appropriate estimates and plans relating to cost management.
Continued uncertain demand for optical components has had, and will continue to have, a material
adverse effect on our results of operations.
A default under our supply agreement with Nortel Networks would have an adverse impact
on our ability to conduct our business.
We are party to a supply agreement with Nortel Networks that has been amended three
times, most recently in January 2006. The supply agreement, as amended, requires that we grant a
license for the assembly, test, post-processing and test intellectual property (but excluding wafer
technology) of certain critical products to Nortel Networks and to any designated alternative
supplier, if at any time, we are unable to manufacture critical products for Nortel Networks in any
material respect for a continuous period of not less than six weeks, or are subject to an
insolvency event, such as a petition or assignment in bankruptcy, appointment of a trustee,
custodian or receiver, or entrance into an arrangement for the general benefit of creditors. In
addition, if there is an insolvency event, Nortel Networks will have the right to buy all Nortel
Networks inventory we hold, and we will be obligated to grant a license to Nortel Networks or any
alternative supplier for the manufacture of all products covered by the first addendum to the
supply agreement. Our revenues and business would be substantially harmed if we were required to
license this assembly, test, post-processing and test intellectual property to Nortel Networks or
any supplier it were to designate.
We and our customers are each dependent upon a limited number of customers.
Historically, we have generated most of our revenues from a limited number of customers.
Sales to one customer, Nortel Networks, accounted for 26% of our revenues for the three month
period ended September 30, 2006, and 48% and 45% of our
27
revenues for the year ended July 1, 2006 and the year ended July 2, 2005, respectively. In
addition to the reduced outlook for revenue from Nortel Networks after the purchase orders under
the supply agreement, as amended, are filled, we expect that revenue from our other major customers
may decline or fluctuate significantly during the remainder of calendar year 2006 and beyond. We
may not be able to offset any such decline in revenues from our existing major customers with
revenues from new customers.
Our dependence on a limited number of customers is due to the fact that the optical
telecommunications systems industry is dominated by a small number of large companies. Similarly,
our customers depend primarily on a limited number of major telecommunications carrier customers to
purchase their products that incorporate our optical components. Many major telecommunication
systems companies and telecommunication carriers are experiencing losses from operations. The
further consolidation of the industry, coupled with declining revenues from our major customers,
may have a material adverse impact on our business.
As a result of our global operations, our business is subject to currency fluctuations that
have adversely affected our results of operations in recent quarters and may continue to do so in
the future.
Our financial results have been materially impacted by foreign currency fluctuations and
our future financial results may also be materially impacted by foreign currency fluctuations. At
certain times in our history, declines in the value of the U.S. dollar versus the U.K. pound
sterling have had a major negative effect on our profit margins and our cash flow. Despite our
change in domicile from the United Kingdom to the United States and the implementation of our
restructuring program to move all assembly and test operations from Paignton, U.K. to Shenzhen,
China, the majority of our expenses are still denominated in U.K. pounds sterling and substantially
all of our revenues are denominated in U.S. dollars. Fluctuations in the exchange rate between
these two currencies and, to a lesser extent, other currencies in which we collect revenues and pay
expenses will continue to have a material affect on our operating results. Additional exposure
could result should the exchange rate between the U.S. dollar and the Chinese Yuan vary more
significantly than it has to date.
We engage in currency transactions in an effort to cover any exposure to such
fluctuations, and we may be required to convert currencies to meet our obligations. Under certain
circumstances, these transactions can have an adverse effect on our financial condition.
We are increasing manufacturing operations in China, which exposes us to risks inherent
in doing business in China.
We are taking advantage of the comparatively low manufacturing costs in China by
transferring substantially all of our assembly and test operations, chip-on-carrier operations and
manufacturing and supply chain management operations to our facility in Shenzhen, China. Operations
in China are subject to greater political, legal and economic risks than our operations in other
countries. In order to operate the facility, we must obtain and retain required legal authorization
and train and hire a workforce. In particular, the political, legal and economic climate in China,
both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be
adversely affected by changes in Chinese laws and regulations such as those related to taxation,
import and export tariffs, environmental regulations, land use rights, intellectual property and
other matters. In addition, we may not obtain or retain the requisite legal permits to continue to
operate in China and costs or operational limitations may be imposed in connection with obtaining
and complying with such permits.
We have been advised that power may be rationed in the location of our Shenzhen
facility, and were power rationing to be implemented, it could either have an adverse impact on our
ability to complete manufacturing commitments on a timely basis or, alternatively, could require
significant investment in generating capacity to sustain uninterrupted operations at the facility.
Our ability to transfer chip-on-carrier operations and manufacturing and supply chain management
operations from our facilities in the U.K. to China would be hindered by a power rationing. We may
also be required to expend greater amounts than we currently anticipate in connection with
increasing production at the facility. Any one of these factors, or a combination of them, could
result in unanticipated costs, which could materially and adversely affect our business.
We intend to export the majority of the products manufactured at our Shenzhen facility.
Under current regulations, upon application and approval by the relevant governmental authorities,
we will not be subject to certain Chinese taxes and will be exempt from certain duties on imported
materials that are used in the manufacturing process and subsequently exported from China as
finished products. However, Chinese trade regulations are in a state of flux, and we may become
subject to other forms of taxation and duties in China or may be required to pay export fees in the
future. In the event that we become subject to new forms of taxation in China, our business and
results of operation could be materially adversely affected.
28
In order to continue as a going concern, we may need capital in excess of our current cash
resources.
In
our Annual Report on Form 10-K for the fiscal year ended July 1, 2006, we disclosed that
based on our cash balances, and given our continuing and expected losses for the foreseeable
future, if we fail to meet managements current cash flow forecasts, or we are unable to draw
sufficient amounts under the three year $25 million senior secured revolving credit agreement with
Wells Fargo Foothill, Inc. and other lenders, which was entered into in August 2006, for any
reason, we would need to raise additional funding of at least $10 million to $20 million through
external sources prior to July 2007 in order to maintain sufficient financial resources in order to
operate as a going concern through the end of fiscal 2007, and that if necessary, we would attempt
to raise additional funds by any one or a combination of the following: (i) completing the sale of
certain assets; (ii) issuing equity, debt or convertible debt or (iii) selling certain non core
businesses.
Since
the filing of our Annual Report on Form 10-K we raised approximately $7.8 million in gross proceeds from the second
closing of our private placement of shares of our common stock and
warrants to purchase shares of common stock and entered into an agreement to sell
our Paignton U.K. site for approximately $9.4 million in gross proceeds in a transaction expected
to close in mid-November 2006. There can be no assurance that we will not need to raise additional
funds to continue as a going concern or of our ability to raise any such capital through the
above, or any other efforts.
Fluctuations in operating results could adversely affect the market price of our common
stock.
Our revenues and operating results are likely to fluctuate significantly in the future.
The timing of order placement, size of orders and satisfaction of contractual customer acceptance
criteria, as well as order or shipment delays or deferrals, with respect to our products, may cause
material fluctuations in revenues. Our lengthy sales cycle, which may extend to more than one year,
may cause our revenues and operating results to vary from period to period and it may be difficult
to predict the timing and amount of any variation. Delays or deferrals in purchasing
decisions may increase as we develop new or enhanced products for new markets, including data
communications, aerospace, industrial and military markets. Our current and anticipated future
dependence on a small number of customers increases the revenue impact of each customers decision
to delay or defer purchases from us. Our expense levels in the future will be based, in large part,
on our expectations regarding future revenue sources and, as a result, net income for any quarterly
period in which material orders fail to occur, or are delayed or deferred could vary significantly.
Because of these and other factors, quarter-to-quarter comparisons of our results of
operations may not be an indication of future performance. In future periods, results of operations
may differ from the estimates of public market analysts and investors. Such a discrepancy could
cause the market price of our common stock to decline.
We may incur additional significant restructuring charges that will adversely affect our
results of operations.
Over the past five years, we have enacted a series of restructuring plans and cost
reduction plans designed to reduce our manufacturing overhead and our operating expenses. In 2001,
we reduced manufacturing overhead and our operating expenses in response to the initial decline in
demand in the optics components industry. In connection with our acquisitions of Nortel Networks
optical components business in November 2002 and New Focus in March 2004, we enacted restructuring
plans related to the consolidation of our operations, which we expanded in September 2004 to
include the transfer of our main corporate functions, including consolidated accounting, financial
reporting, tax and treasury, from Abingdon, U.K. to our new U.S headquarters in San Jose,
California.
In May and November of 2004, we adopted additional restructuring plans, which included
the transfer of our assembly and test operations from Paignton, U.K. to Shenzhen, China, a process
that commenced in the quarter ended October 2, 2004. This transition was substantially complete by
the end of March 2006, except for a chip-on-carrier assembly process we added to the transition
plan in November 2005, and which we expect to be completed by the end of December 2006. In May
2006, we announced our latest cost reduction plans, which included transitioning all remaining
manufacturing support and supply chain management, along with pilot line production and production
planning, from Paignton to Shenzhen, which we expect will be complete
in the quarter ended December 31, 2006.
29
With respect to the transfer of the operations described in the previous paragraph, some
of which are still in the process of being transferred, we have spent $26.0 million as of
September 30, 2006, and we anticipate spending a total of approximately $30 million to $37 million,
including the cost reduction plan announced in May 2006. The substantial portion of the remaining
spending relates to personnel and personnel related costs. We expect the cost reduction plan
announced in May 2006 to reduce our costs by between $5.5 million and $6.5 million a quarter, when
compared to the expenses incurred in the quarter ended April 1, 2006, with the cost savings
expected to be realized in the quarter ending March 31, 2007.
We may incur charges in excess of amounts currently estimated for these restructuring
and cost reduction plans. We may incur additional charges in the future in connection with future
restructurings and cost reduction plans. These charges, along with any other charges, have
adversely affected, and will continue to adversely affect, our results of operations for the
periods in which such charges have been, or will be, incurred.
Our results of operations may suffer if we do not effectively manage our inventory, and
we may incur inventory-related charges.
We need to manage our inventory of component parts and finished goods effectively to
meet changing customer requirements. The ability to accurately forecast customers product needs is
difficult. Some of our products and supplies have in the past, and may in the future, become
obsolete while in inventory due to rapidly changing customer specifications or a decrease in
customer demand. If we are not able to manage our inventory effectively, we may need to write down
the value of some of our existing inventory or write off unsaleable or obsolete inventory, which
would adversely affect our results of operations. We have from time to time incurred significant
inventory-related charges. During the year ended July 1, 2006, we incurred significant costs for
inventory production variances associated with unanticipated shifts in the mix of our customers
product orders. Any such charges we incur in future periods could significantly adversely affect
our results of operations.
Charges to earnings resulting from the application of the purchase method of accounting may
adversely affect the market value of our common stock.
We account for our acquisitions using the purchase method of accounting. In accordance
with GAAP, we allocate the total estimated purchase price to the acquired companys net tangible
assets, amortizable intangible assets, and in-process research and development based on their fair
values as of the date of announcement of the transaction, and record the excess of the purchase
price over those fair values as goodwill. With respect to our acquisition of New Focus, we expensed
the portion of the estimated purchase price allocated to in-process research and development in the
third quarter of fiscal 2004. We will incur an increase in the amount of amortization expense over
the estimated useful lives of certain of the intangible assets acquired in connection with the
acquisition on an annual basis. To the extent the value of goodwill or intangible assets with
indefinite lives becomes impaired, we may be required to incur material charges relating to the
impairment of those assets. In the year ended July 2, 2005, following a triggering event in the
third quarter and in accordance with our policy of evaluating long-lived assets for impairment in
the fourth quarter, we recorded charges totaling $114.2 million related to the impairment of
goodwill and purchased intangible assets. In addition, in the past, after the completion of a
transaction, we have amended the provisional values of assets and liabilities we obtained as part
of transactions, specifically the acquisition of the optical components business of Nortel
Networks. This amendment resulted in the value of our inventory being increased by $20.2 million,
current liabilities being increased by approximately $1.3 million, intangible assets being
decreased by approximately $9.1 million and property, plant and equipment being increased by $9.8
million. In March 2006, we acquired Avalon Photonics AG, and recorded $2.5 million as the value of
goodwill and $2.2 million as the value of purchased intangible assets, both of which will be
subject to reviews for impairment of value in the future. We may incur charges in the future as a
result of any such transaction, which charges may have an adverse effect on our earnings.
Bookham Technology plc may not be able to utilize tax losses and other tax attributes
against the receivables that arise as a result of its transaction with Deutsche Bank.
On August 10, 2005, Bookham Technology plc purchased all of the issued share capital of
City Leasing (Creekside) Limited, a subsidiary of Deutsche Bank. Creekside is entitled to
receivables of £73.8 million (approximately $135.8 million, based on an exchange rate of £1.00 to
$1.8403, the noon buying rate on September 2, 2005 for cable transfers in foreign currencies as
certified by the Federal Reserve Bank of New York) from Deutsche Bank in connection with certain
aircraft subleases and will in turn apply those payments over a two-year term to obligations of
£73.1 million (approximately $134.5 million based on an exchange rate of £1.00 to $1.8403) owed to
Deutsche Bank. As a result of these transactions, Bookham Technology plc will have available
through Creekside cash of approximately £6.63 million (approximately $12.2 million based on an
exchange rate of £1.00 to $1.8405). We expect Bookham Technology plc to utilize certain expected
tax losses and other tax attributes to reduce the taxes that might otherwise be due
30
by Creekside as the receivables are paid. In the event that Bookham Technology plc is not able
to utilize these tax losses and other tax attributes when U.K. tax returns are filed for the
relevant periods (or these tax losses and other tax attributes do not arise), Creekside may have to
pay taxes, reducing the cash available from Creekside. In the event there is a future change in
applicable U.K. tax law, Creekside, and in turn Bookham Technology plc, would be responsible for
any resulting tax liabilities, which amounts could be material to our financial condition or
operating results.
Our
products are complex and may take longer to develop than anticipated
and, as a
result, we may not recognize revenues from new products until after long field testing and customer
acceptance periods.
Many of our new products must be tailored to customer specifications. As a result, we
are constantly developing new products and using new technologies in those products. For example,
while we currently manufacture and sell discrete gold box technology, we expect that many of our
sales of gold box technology will soon be replaced by pluggable modules. New products or
modifications to existing products often take many quarters to develop because of their complexity
and because customer specifications sometimes change during the development cycle. We often incur
substantial costs associated with the research and development and sales and marketing activities
in connection with products that may be purchased long after we have incurred the costs associated
with designing, creating and selling such products. In addition, due to the rapid technological
changes in our market, a customer may cancel or modify a design project before we begin large-scale
manufacture of the product and receive revenue from the customer. It is unlikely that we would be
able to recover the expenses for cancelled or unutilized design projects. It is difficult to
predict with any certainty, particularly in the present economic climate, the frequency with which
customers will cancel or modify their projects, or the effect that any cancellation or modification
would have on our results of operations.
If our customers do not qualify our manufacturing lines or the manufacturing lines of
our subcontractors for volume shipments, our operating results could suffer.
Most of our customers do not purchase products, other than limited numbers of evaluation
units, prior to qualification of the manufacturing line for volume production. Our existing
manufacturing lines, as well as each new manufacturing line, must pass through varying levels of
qualification with our customers. Our manufacturing lines have passed our qualification standards,
as well as our technical standards. However, our customers may also require that we pass their
specific qualification standards and that we, and any subcontractors that we may use, be registered
under international quality standards. In addition, we have in the past, and may in the future,
encounter quality control issues as a result of relocating our manufacturing lines or introducing
new products to fill production. We may be unable to obtain customer qualification of our
manufacturing lines or we may experience delays in obtaining customer qualification of our
manufacturing lines. Such delays would harm our operating results and customer relationships.
Delays, disruptions or quality control problems in manufacturing could result in delays
in product shipments to customers and could adversely affect our business.
We may experience delays, disruptions or quality control problems in our manufacturing
operations or the manufacturing operations of our subcontractors. As a result, we could incur
additional costs that would adversely affect gross margins, and product shipments to our customers
could be delayed beyond the shipment schedules requested by our customers, which would negatively
affect our revenues, competitive position and reputation. Furthermore, even if we are able to
deliver products to our customers on a timely basis, we may be unable to recognize revenues at the
time of delivery based on our revenue recognition policies.
We may experience low manufacturing yields.
Manufacturing yields depend on a number of factors, including the volume of production
due to customer demand and the nature and extent of changes in specifications required by customers
for which we perform design-in work. Higher volumes due to demand for a fixed, rather than
continually changing, design generally result in higher manufacturing yields, whereas lower volume
production generally results in lower yields. In addition, lower yields may result, and have in the
past resulted, from commercial shipments of products prior to full manufacturing qualification to
the applicable specifications. Changes in manufacturing processes required as a result of changes
in product specifications, changing customer needs and the introduction of new product lines have
historically caused, and may in the future cause, significantly reduced manufacturing yields,
resulting in low or negative margins on those products. Moreover, an increase in the rejection rate
of products during the quality control process, either before, during or after manufacture, results
in lower yields and margins. Finally, manufacturing yields and margins can also be lower if we
receive or inadvertently use defective or contaminated materials from our suppliers.
31
We depend on a number of suppliers who could disrupt our business if they stopped,
decreased or delayed shipments.
We depend on a number of suppliers of raw materials and equipment used to manufacture
our products. Some of these suppliers are sole sources. We typically have not entered into
long-term agreements with our suppliers and, therefore, these suppliers generally may stop
supplying materials and equipment at any time. The reliance on a sole supplier or limited number of
suppliers could result in delivery problems, reduced control over product pricing and quality, and
an inability to identify and qualify another supplier in a timely manner. Any supply deficiencies
relating to the quality or quantities of materials or equipment we use to manufacture our products
could adversely affect our ability to fulfill customer orders or our financial results of
operations.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights,
including patents, design rights, trade secrets, trademarks, know-how and continuing technological
innovation. We maintain an active program of identifying technology appropriate for patent
protection. Our practice is to require employees and consultants to execute non-disclosure and
proprietary rights agreements upon commencement of employment or consulting arrangements. These
agreements acknowledge our exclusive ownership of all intellectual property developed by the
individuals during their work for us and require that all proprietary information disclosed will
remain confidential. Although such agreements may be binding, they may not be enforceable in all
jurisdictions and any breach of a confidentiality obligation could have a very serious effect on
our business and the remedy for such breach may be limited.
Our intellectual property portfolio is an important corporate asset. The steps we have
taken and may take in the future to protect our intellectual property may not adequately prevent
misappropriation or ensure that others will not develop competitive technologies or products. We
cannot assure investors that our competitors will not successfully challenge the validity of our
patents or design products that avoid infringement of our proprietary rights with respect to our
technology. There can be no assurance that other companies are not investigating or developing
other similar technologies, that any patents will be issued from any application pending or filed
by us or that, if patents are issued, the claims allowed will be sufficiently broad to deter or
prohibit others from marketing similar products. In addition, we cannot assure investors that any
patents issued to us will not be challenged, invalidated or circumvented, or that the rights under
those patents will provide a competitive advantage to us. Further, the laws of certain regions in
which our products are or may be developed, manufactured or sold, including Asia-Pacific, Southeast
Asia and Latin America, may not protect our products and intellectual property rights to the same
extent as the laws of the United States, the U.K. and continental European countries. This is
especially relevant as we transfer of our assembly and test operations and chip-on-carrier
operations from our facilities in the U.K. to Shenzhen, China and as our competitors establish
manufacturing operations in China to take advantage of comparatively low manufacturing costs.
Our products may infringe the intellectual property rights of others which could result
in expensive litigation, require us to obtain a license to use the technology from third parties,
or we may be prohibited from selling certain products in the future.
Companies in the industry in which we operate frequently receive claims of patent
infringement or infringement of other intellectual property rights. In this regard, third parties
may in the future assert claims against us concerning our existing products or with respect to
future products under development. We have entered into and may in the future enter into
indemnification obligations in favor of some customers that could be triggered upon an allegation
or finding that we are infringing other parties proprietary rights. If we do infringe a third
partys rights, we may need to negotiate with holders of patents relevant to our business. We have
from time to time received notices from third parties alleging infringement of their intellectual
property and where appropriate have entered into license agreements with those third parties with
respect to that intellectual property. We may not in all cases be able to resolve allegations of
infringement through licensing arrangements, settlement, alternative designs or otherwise. We may
take legal action to determine the validity and scope of the third-party rights or to defend
against any allegations of infringement. In the course of pursuing any of these means or defending
against any lawsuits filed against us, we could incur significant costs and diversion of our
resources. Due to the competitive nature of our industry, it is unlikely that we could increase our
prices to cover such costs. In addition, such claims could result in significant penalties or
injunctions that could prevent us from selling some of our products in certain markets or result in
settlements that require payment of significant royalties that could adversely affect our ability
to price our products profitably.
If we fail to obtain the right to use the intellectual property rights of others
necessary to operate our business, our ability to succeed will be adversely affected.
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Certain companies in the telecommunications and optical components markets in which we
sell our products have experienced frequent litigation regarding patent and other intellectual
property rights. Numerous patents in these industries are held by others, including academic
institutions and our competitors. Optical component suppliers may seek to gain a competitive advantage or other third parties may seek an economic
return on their intellectual property portfolios by making infringement claims against us. In the
future, we may need to obtain license rights to patents or other intellectual property held by
others to the extent necessary for our business. Unless we are able to obtain such licenses on
commercially reasonable terms, patents or other intellectual property held by others could inhibit
our development of new products for our markets. Licenses granting us the right to use third-party
technology may not be available on commercially reasonable terms, if at all. Generally, a license,
if granted, would include payments of up-front fees, ongoing royalties or both. These payments or
other terms could have a significant adverse impact on our operating results. Our larger
competitors may be able to obtain licenses or cross-license their technology on better terms than
we can, which could put us at a competitive disadvantage.
The markets in which we operate are highly competitive, which could result in lost sales
and lower revenues.
The market for fiber optic components is highly competitive and such competition could
result in our existing customers moving their orders to competitors. Certain of our competitors may
be able more quickly and effectively to:
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devote needed resources to the development, production, promotion and sale of products; and |
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deliver competitive products at lower prices. |
Many of our current competitors, as well as a number of our potential competitors, have
longer operating histories, greater name recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and marketing resources than we do. In
addition, market leaders in industries such as semiconductor and data communications, who may also
have significantly more resources than we do, may in the future enter our market with competing
products. All of these risks may be increased if the market were to further consolidate through
mergers or other business combinations between competitors.
We may not be able to compete successfully with our competitors and aggressive competition in
the market may result in lower prices for our products or decreased gross profit margins. Any such
development would have a material adverse effect on our business, financial condition and results
of operations.
We generate a significant portion of our revenues internationally and therefore are
subject to additional risks associated with the extent of our international operations.
For the three month period ended September 30, 2006, 23% of our revenues were derived in
the United States and 77% of our revenues were derived outside the United States. For the year
ended July 1, 2006, the year ended July 2, 2005, the six months ended July 3, 2004, and the year
ended December 31, 2003, 21%, 28%, 26%, and 9% of our revenues, respectively, were derived in the
United States and 79%, 72%, 74%, and 91%, respectively, were derived outside the United States. We
are subject to additional risks related to operating in foreign countries, including:
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difficulty in enforcing or adequately protecting our intellectual property; |
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foreign taxes; |
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political, legal and economic instability in foreign markets; and |
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foreign regulations. |
Any of these risks, or any other risks related to our foreign operations, could
materially adversely affect our business, financial condition and results of operations.
Our business will be adversely affected if we cannot manage the significant changes in the
number of our employees and the size of our operations.
We have significantly reduced the number of employees and scope of our operations
because of declining demand for certain of our products and continue to reduce our headcount in
connection with our on-going restructuring and cost reduction efforts. There is a
33
risk that, during periods of growth or decline, management will not sufficiently coordinate
the roles of individuals to ensure that all areas of our operations receive appropriate focus and
attention. If we are unable to manage our headcount, manufacturing capacity and scope of operations
effectively, the cost and quality of our products may suffer, we may be unable to attract and
retain key personnel and we may be unable to market and develop new products. Further, the
inability to successfully manage the substantially larger and geographically more diverse
organization, or any significant delay in achieving successful management, could have a material
adverse effect on us and, as a result, on the market price of our common stock.
We may be faced with product liability claims.
Despite quality assurance measures, there remains a risk that defects may occur in our
products. The occurrence of any defects in our products could give rise to liability for damages
caused by such defects and for consequential damages. They could, moreover, impair the markets
acceptance of our products. Both could have a material adverse effect on our business and financial
condition. In addition, we may assume product warranty liabilities related to companies we acquire
which could have a material adverse effect on our business and financial condition. In order to
mitigate the risk of liability for damages, we carry product liability insurance with a $26 million
aggregate annual limit and errors and omissions insurance with a $5 million annual limit.
This insurance may not adequately cover our costs arising from defects in our products or otherwise.
If we fail to attract and retain key personnel, our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel.
Competition for highly skilled technical people is extremely intense and we continue to face
difficulty identifying and hiring qualified engineers in many areas of our business. We may not be
able to hire and retain such personnel at compensation levels consistent with our existing
compensation and salary structure. Our future also depends on the continued contributions of our
executive management team and other key management and technical personnel, each of whom would be
difficult to replace. The loss of services of these or other executive officers or key personnel or
the inability to continue to attract qualified personnel could have a material adverse effect on
our business.
Similar to other technology companies, we rely upon our ability to use stock options and
other forms of equity-based compensation as key components of our executive and employee
compensation structure. Historically, these components have been critical to our ability to retain
important personnel and offer competitive compensation packages. Without these components, we would
be required to significantly increase cash compensation levels (or develop alternative compensation
structures) in order to retain our key employees. Accounting rules relating to the expensing of
equity compensation may cause us to substantially reduce, modify, or even eliminate, all or
portions of our equity compensation programs.
Our business and future operating results may be adversely affected by events outside of
our control.
Our business and operating results are vulnerable to interruption by events outside of
our control, such as earthquakes, fire, power loss, telecommunications failures, political
instability, military conflict and uncertainties arising out of terrorist attacks, including a
global economic slowdown, the economic consequences of additional military action or additional
terrorist activities and associated political instability, and the effect of heightened security
concerns on domestic and international travel and commerce.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results, which may cause stockholders to lose confidence in the accuracy of
our financial statements.
Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our
brand and operating results could be harmed. In addition, compliance with the internal control
requirements, as well as other financial reporting standards applicable to a public company,
including the Sarbanes-Oxley Act of 2002, has in the past and will in the future continue to
involve substantial cost and investment of our managements time.
We will continue to spend significant time and incur significant costs to assess and report on the
effectiveness of internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act. As of July 1, 2006, we reported a material weakness in our internal control
over financial reporting related to the inconsistent treatment of translation/transaction gains and
losses in respect to certain intercompany loan balances.
34
Although we believe we have implemented adequate review procedures to remedy this material
weakness, and we expect to conclude as to the satisfactory remediation of this material weakness at
the end of our December 2006 quarter, once the related procedures have been in place for two full
fiscal quarters, finding more material weaknesses in the future could make it more difficult for us
to attract and retain qualified persons to serve on our board of directors or as executive
officers, which could harm our business. In addition, if we discover future material weaknesses,
disclosure of that fact could reduce the markets confidence in our financial statements, which
could harm our stock price and our ability to raise capital.
Our business involves the use of hazardous materials, and environmental laws and
regulations may expose us to liability and increase our costs.
We historically handled small amounts of hazardous materials as part of our
manufacturing activities and now handle more and different hazardous materials as a result of the
manufacturing processes related to New Focus, the optical components business acquired from Nortel
Networks and the product lines we acquired from Marconi. Consequently, our operations are subject
to environmental laws and regulations governing, among other things, the use and handling of
hazardous substances and waste disposal. We may be required to incur environmental costs to comply
with current or future environmental laws. As with other companies engaged in manufacturing
activities that involve hazardous materials, a risk of environmental liability is inherent in our
manufacturing activities, as is the risk that our facilities will be shut down in the event of a
release of hazardous waste. The costs associated with environmental compliance or remediation
efforts or other environmental liabilities could adversely affect our business. In addition, under
applicable EU regulations, we, along with other electronics component manufacturers, are prohibited
from using lead and certain other hazardous materials in our products. We have incurred
unanticipated expenses in connection with the related reconfiguration of our products, and could
lose business or face product returns if we failed to implement these requirements properly or on a
timely basis.
Litigation regarding Bookham Technology plcs initial public offering and follow-on
offering and any other litigation in which we become involved, including as a result of
acquisitions, may substantially increase our costs and harm our business.
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc.
et al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers
and directors, or the New Focus Individual Defendants, in the United States District Court for the
Southern District of New York. Also named as defendants were Credit Suisse First Boston
Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp.,
or the Underwriter Defendants, the underwriters in New Focuss initial public offering. Three
subsequent lawsuits were filed containing substantially similar allegations. These complaints have
been consolidated. On April 19, 2002, plaintiffs filed an amended class action complaint, described
below, naming as defendants the New Focus Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a class action complaint was filed against Bookham Technology plc
and others in the United States District Court for the Southern District of New York. On April 19,
2002, plaintiffs filed an amended complaint, or the Amended Complaint. The Amended Complaint names
as defendants Bookham Technology plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens,
Inc., two of the underwriters of Bookham Technology plcs initial public offering in April 2000,
and Andrew G. Rickman, Stephen J. Cockrell and David Simpson, or the Bookham Individual Defendants,
each of whom was an officer and/or director at the time of the initial public offering.
The Amended Complaint asserts claims under certain provisions of the securities laws of
the United States. It alleges, among other things, that the prospectuses for Bookham Technology
plcs and New Focuss initial public offerings were materially false and misleading in describing
the compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold our or New Focus common stock), costs, attorneys fees,
experts fees, interest and other expenses. In October 2002, the New Focus Individual Defendants
and the Bookham Individual Defendants were dismissed, without prejudice, from the action. In July
2002, all defendants filed motions to dismiss the Amended Complaint. The motion was denied as to
Bookham Technology plc and New Focus in February 2003. Special committees of the board of directors
authorized the companies to negotiate a settlement of pending claims substantially consistent with
a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their
insurers.
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Plaintiffs and most of the issuer defendants and their insurers have entered into a
stipulation of settlement for the claims against the issuer defendants, including Bookham and New
Focus. Under the stipulation of settlement, the plaintiffs will dismiss and release all claims
against participating defendants in exchange for a payment guaranty by the insurance companies
collectively responsible for insuring the issuers in the related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have against the
underwriters. On February 15, 2005, the court issued an Opinion and Order preliminarily approving
the settlement provided that the defendants and plaintiffs agree to a modification narrowing the
scope of the bar order set forth in the original settlement agreement. The parties agreed to the
modification narrowing the scope of the bar order, and on August 31, 2005, the court issued an
order preliminarily approving the settlement and setting a public hearing on its fairness which
took place on April 24, 2006. The judge has yet to issue a decision on this hearing.
Litigation is subject to inherent uncertainties, and an adverse result in these or other
matters that may arise from time to time could have a material adverse effect on our business,
results of operations and financial condition. Any litigation to which we are subject may be costly
and, further, could require significant involvement of our senior management and may divert
managements attention from our business and operations.
A variety of factors could cause the trading price of our common stock to be volatile or
decline.
The market price of our common stock has been, and is likely to continue to be, highly
volatile due to causes in addition to publication of our business results, such as:
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announcements by our competitors and customers of their
historical results or technological innovations or new
products; |
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developments with respect to patents or proprietary rights; |
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governmental regulatory action; and |
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general market conditions. |
Since Bookham Technology plcs initial public offering in April 2000, Bookham Technology
plcs ADSs and ordinary shares, our shares of common stock and the shares of our customers and
competitors have experienced substantial price and volume fluctuations, in many cases without any
direct relationship to the affected companys operating performance. An outgrowth of this market
volatility is the significant vulnerability of our stock price and the stock prices of our
customers and competitors to any actual or perceived fluctuation in the strength of the markets we
serve, regardless of the actual consequence of such fluctuations. As a result, the market prices
for these companies are highly volatile. These broad market and industry factors caused the market
price of Bookham Technology plcs ADSs and ordinary shares, and our common stock to fluctuate, and
may in the future cause the market price of our common stock to fluctuate, regardless of our actual
operating performance or the operating performance of our customers.
The future sale of substantial amounts of our common stock could adversely affect the
price of our common stock.
As of September 30, 2006, affiliates of Nortel Networks held 3,999,999 shares of our
common stock. Other stockholders or groups of stockholders also hold significant percentages of our
shares of common stock. In September 2006, pursuant to a private placement, we issued an aggregate
11,594,667 shares of common stock and warrants to purchase an
aggregate of 2,898,667 shares of our
common stock. In January and March 2006, pursuant to a series of transactions we issued an
aggregate of 10,507,158 shares of common stock and warrants to purchase an aggregate of 1,086,001
shares of common stock. On September 1, 2006, we sold 8,696,000 shares of our common stock and
warrants to purchase up to 2,174,000 shares of our common stock in a private placement. In
connection with that private placement, on September 19, 2006 we sold an additional 2,898,667
shares of common stock and additional warrants to purchase up to 724,667 shares of common stock in
a second closing. Sales by Nortel Networks or other holders of substantial amounts of shares of
our common stock in the public or private market could adversely affect the market price of our
common stock by increasing the supply of shares available for sale compared to the demand in the
public and private markets to buy our common stock. These sales may also make it more difficult for
us to sell equity securities in the future at a time and price that we deem appropriate to meet our
capital needs.
Some anti-takeover provisions contained in our charter and under Delaware laws could
hinder a takeover attempt.
We are subject to the provisions of Section 203 of the General Corporation Law of the
State of Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from
engaging in business combinations with some stockholders for a specified period of time without the
approval of the holders of substantially all of our outstanding voting stock. Such provisions could
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delay or impede the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving us, even if such events could be beneficial, in the
short-term, to the interests of the stockholders. In addition, such provisions could limit the
price that some investors might be willing to pay in the future for shares of our common stock. Our
certificate of incorporation and bylaws contain provisions relating to the limitations of liability
and indemnification of our directors and officers, dividing our board of directors into three
classes of directors serving three-year terms and providing that our stockholders can take action
only at a duly called annual or special meeting of stockholders. These provisions also may have the
effect of deterring hostile takeovers or delaying changes in control or management of us.
Item 6. Exhibits
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this quarterly report, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BOOKHAM, INC. |
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By:
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/s/ Stephen Abely
Stephen Abely
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November
8, 2006
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Chief Financial Officer (Principal Financial and
Accounting Officer) |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Exhibit |
10.1(1)
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Credit Agreement, dated as of August 2, 2006, among Bookham, Inc., Bookham Technology plc, New Focus,
Inc. and Bookham (US) Inc., Wells Fargo Foothill, Inc. and other lenders party hereto. |
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10.2(1)
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Security Agreement, dated as of August 2, 2006, among Bookham, Inc., Onetta, Inc., Focused Research,
Inc., Globe Y. Technology, Inc., Ignis Optics, Inc,. Bookham (Canada) Inc,. Bookham Nominees Limited
and Bookham International Ltd., Wells Fargo Foothill, Inc. and other secured parties party hereto. |
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10.3(2)
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Securities Purchase Agreement, dated as of August 31, 2006, by and among Bookham, Inc. and the
Investors (as defined therein). |
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10.4(2)
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Registration Rights Agreement,
dated as of August 31, 2006, by and among Bookham, Inc. and the
Holders (as defined therein). |
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10.5(2)
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Form of Warrant. |
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31.1
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer. |
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32.1
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Section 1350 Certification of Chief Executive Officer. |
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32.2
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Section 1350 Certification of Chief Financial Officer. |
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(1)
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Incorporated by reference to the Registrants Form 10-K (file No. 0-30684) filed on September 14, 2006. |
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(2)
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Incorporate by reference to the Registrants Form 8-K (file No. 0-30684) filed on September 5, 2006. |
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